Finance Committee on March 19th, 2018

[Jonathan Hamel]

I think that a synergy and a collaboration can be developed between organizations such as FINTRAC and the major cryptocurrency platforms, such as Coinsquare or Coinbase.

For example, there is a potential list of people who are under sanctions and have been prohibited from doing business in Canada. When it comes to such sanctions, it could be easy to identify those people if they open accounts revealing their true identity, obviously. So those are side actors, like those involved in exchanges, that could have a relatively natural synergy with organizations such as FINTRAC. I think it is in the interest of the Bitcoin community to ensure that the technology is not used to facilitate money laundering and the financing of terrorist activities.

As I was saying, so far, the community has always collaborated, and it is participating, for example, in establishing a legal and legislative framework that will help develop the good sides of that technology.

[The Chair, Liberal, Wayne Easter]

We'll have to leave it there.

We'll turn to Mr. Fergus for five minutes. We are going to run into bells at about 6:15, but we can go a few minutes after that. Go ahead.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much, Mr. Chair.

I would like to thank today's two witnesses for their presentations.

I will start with Mr. Hamel.

Mr. Hamel, I have a question that may be a bit simple, but I hope you will be able to answer it.

Do you think that digital currencies are used to launder proceeds of crime or other criminal activities?

[Jonathan Hamel]

I think they are, on a rather minimal level, as I said in my opening remarks.

I am referring to the report according to which less than 1%, or around 1%, of transactions might be related to illicit trade, for those reasons I mentioned earlier: bitcoin transactions can be traced relatively easily. So in and of itself, it is a bad technology for criminal activities, since the transactions made will be archived forever in one of the most solid and secure databases in the world.

So only a very small portion is probably related to crime, sort of like with cash, for example. Cash is basically used for illicit activities, but I don't think a very large portion of cash is related to things like the drug trade or various illicit activities.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

According to you, are cash or other forms of currency more or less secure than digital currencies?

[Jonathan Hamel]

In nominal value....

[Greg Fergus, Liberal, Hull—Aylmer, QC]

No, I'm talking about percentages. You estimated that 1% of....

[Jonathan Hamel]

For example, the Under Secretary of the Treasury was saying that the U.S. dollar and the traditional banking channels are used much more by people who are trying to launder money and for financing terrorist activities than technologies like bitcoin.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Do you know what the percentage is?

[Jonathan Hamel]

I don't know what the percentage is, but it's....

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I'm sorry. This is not a hostile question, but you brought up a number. You think that 1% of transactions made using digital currencies are suspicious.

[Jonathan Hamel]

That figure relates to bitcoin.

As Mr. Dusseault said earlier, in the case of some currencies, we just don't know where the transactions are going because they are truly anonymous. The problem may be more on that side.

However, when it comes to bitcoin itself, the technology is traceable, transparent and pseudo-anonymous. For police forces, for example, it is relatively easy to take action. They are starting to use some pretty advanced tools to gather evidence. We are starting to note that, for example, at the RCMP and in various police forces around the world.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Do you think that bitcoin users like you would accept less anonymity in order to support crime fighting efforts?

[Jonathan Hamel]

In the protocol itself, no, because it is established consensually on the network. It is immune against any government action. However, as I was saying, bitcoin users who use exchange platforms such as Coinsquare and Coinbase are already relinquishing part of their anonymity by identifying themselves. What you are proposing already exists among players who are established on the network.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I am sure that you followed our meetings on this study. A number of security experts at the RCMP and FINTRAC told the committee they believed that bitcoin or digital currencies are a plague on the system when it comes to ensuring that money is used for legal purposes.

Those professionals feel that there is a problem, but you are convinced they are wrong. Why do you think that?

[Jonathan Hamel]

I don't agree with them. I don't think that, to prevent criminal activities, we should attack pseudo-anonymity and the “transactability” of the bitcoin technology, which is a bearer note, sort of like cash. As I said, the players involved have all the necessary information and want to collaborate with organizations such as FINTRAC to identify malicious players.

That said, I don't think that, in the case of this technology, we need to identify participants more, at least not through the protocol. It would actually be very difficult to do so. If Canada had to take that road, it should think about how to proceed. This raises worrisome questions about the Internet's neutrality. If Canada had to require the identification of participants on the bitcoin network, the entire industry of block chains that is currently emerging in Canada would topple by tomorrow.

[The Chair, Liberal, Wayne Easter]

We'll have to leave it there.

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

Mr. Hamel, thank you for your testimony.

I want to ask about the intrinsic value of Bitcoin. Currencies have traditionally held their value because they've been backed, either by a commodity like gold, or produced by a precious metal like silver, or more recently, just by the implicit taxation power of the government that stands behind that currency. Bitcoin has none of those things. Why should we believe in its intrinsic value?

[Jonathan Hamel]

On the intrinsic value of Bitcoin, first of all, I will restate that there was never a price set for Bitcoin. The value that you see today is really based on—

[Pierre Poilievre, Conservative, Carleton, ON]

It's the market value.

[Jonathan Hamel]

Yes, the market value. Some economists say that gold is also a bubble, but it's a 5,000-year-old bubble. I would say that Bitcoin has value because people see utility in the network. It is secure, easy to transact, and fungible, and you can separate every subunit of Bitcoin to the hundred-millionth of a unit. In every aspect it's a really good currency, but it's not a currency by definition.

You mentioned gold. I think the similarities with gold are really close, but I would say that the intrinsic value from Bitcoin really comes from the market that values it. I think it's a catch-22 to analyze Bitcoin with traditional financial paradigms.

[Pierre Poilievre, Conservative, Carleton, ON]

The market determines the price; it doesn't necessarily determine the value. I make a distinction between price and value in the following way. During the dot-com bubble, the price of stocks in companies that had no earnings or, in some cases no revenue, was very high. That was based on voluntary purchase and sale of securities in those companies, but the value obviously wasn't that high, and eventually the price fell to the value, and the bubble burst. Just because people are paying a certain price for Bitcoin doesn't mean it is worth that.

[Jonathan Hamel]

I would say that people were pricing a future Internet revolution that probably a lot of the companies involved in were not able to deliver. I would say the difference between the Internet bubble and the actual cryptocurrency market is that the Internet bubble was using a lot of leverage. There's no leverage in Bitcoin. It's pretty much an all-cash market, so you cannot have a cascading effect of market crash and margin calls and people losing everything. That's why people involved in Bitcoin and cryptocurrency are able to sustain 50%, 60%, or 80% loss: it's because they probably paid entirely in cash, their holdings. That's a big difference from traditional markets.

I think we can safely say that the real Internet revolution came after the Internet bubble. Companies like Amazon went through it, and bigger companies like Google emerged afterwards. The multiplication of all coins—coins that are copied based on Bitcoin and launched through initial coin offerings, which pretty much look like scam IPOs—are probably similar to the dot-com bubble. However, we think that the true revolution will come afterwards.

[Pierre Poilievre, Conservative, Carleton, ON]

At least during the dot-com era you could speculate that one day these companies would turn a profit, which they would translate into dividends, so you could speculate on an intrinsic value down the road. Bitcoin doesn't even purport to pay dividends. Owning a Bitcoin will not pay you a dividend, unlike a share in a company that may one day profit. I guess what I'm saying is, what is underneath Bitcoin that is valuable and that therefore justifies the price?

[Jonathan Hamel]

First, there's a finite amount of Bitcoin—there are only going to be 21 million Bitcoin. It's kind of like gold in that it's a safe asset. It's funny to say this when we have 30% to 40% fluctuation, but it's still an early and young market. Probably in the early days of gold, gold prices were fluctuating 20%, 40%, or 50%, maybe 5,000 years ago. However, we believe that in the future Bitcoin will remain pretty much stable, and I'm on the side of people who think that Bitcoin will become some kind of reserve currency, kind of like gold was in the early 20th century. Maybe other cryptocurrencies or other smart assets will be based on that finite amount.

One interesting property of Bitcoin is that not only is the finite amount known, the rate emission through time is known. In a Parliament like that, having confidence in an asset that will deliver predictable inflation through time, I think, makes it pretty interesting. People have confidence in the Bitcoin protocol and in the developer who actually sustained and maintained the technology.