Industry Committee on Oct. 27th, 2022

[The Chair, Liberal, Joël Lightbound]

I call this meeting to order. Good afternoon, everyone.

I would like to point out that the sound tests were done with today's witnesses.

Thanks to everyone for joining us. We apologize to our witnesses for the delayed start to this committee meeting. We had three votes in the House, and that's the reason for this delay. Also, I want to extend, on behalf of the committee, my most sincere gratitude to all of you for making yourselves available on such short notice to start this study with us.

Welcome to meeting number 41 of the House of Commons Standing Committee on Industry and Technology. Pursuant to Standing Order 108(2) and a motion adopted by the committee on Monday, September 26, 2022, the committee is meeting to study the current state of blockchain technology in Canada and its potential for innovation.

Today's meeting is taking place in a hybrid format, pursuant to the House order of Thursday, June 23, 2022.

Today, we are fortunate to have with us Laure Fouin and Matthew Burgoyne, co‑chairs of the Digital Assets and Blockchain Group at Osler, Hoskin & Harcourt LLP.

We are also welcoming Pascal St-Jean, president of 3iQ Corporation, who is here with us in Ottawa.

Finally, we are welcoming Justyna Osowska, founder of Women in Blockchain Canada.

Thank you all for joining us. I would like to remind you that interpretation services are available and that you can speak in the language of your choice.

Without further ado, I give the floor to Mrs. Fouin for five minutes.

[Laure Fouin, Co-Chair Digital Assets and Blockchain, Osler, Hoskin & Harcourt LLP, As an Individual]

Thank you, Mr. Chair.

I thank the committee for undertaking a study on the current state and potential applications of blockchain technology, as well as for inviting us to comment in this context.

As Mr. Chair mentioned, I am a partner at the law firm of Osler, Hoskin & Harcourt LLP, which has created a team specializing in digital assets and blockchain.

I will make my presentation in French,

but I will be happy to take and answer any questions in English if needed.

The existence of this team, which does not correspond to an area of law, but rather to a type of asset and technology, leads me to make a first observation about the scope of what needs to be covered when blockchain is studied.

We have a team of 50 lawyers covering multiple areas of law. It's not just me and Mr. Burgoyne, who have our own areas of law. Similarly, blockchain challenges our country's jurisdiction over commerce, currency exchange, coinage and paper money, as well as banking and criminal law, and I'm probably forgetting some.

In this context, in order to provide some food for thought, I propose to review the technology, the type of assets involved, and the various people involved.

First, let's talk about the technology. First and foremost, blockchain is the technology behind virtual currencies. In fact, the creation of virtual currencies, bitcoin being the first of those, required the development of blockchain technology. Over time, other applications have emerged and other digital assets have been created.

Then there are the assets involved. Digital assets using blockchain can be divided into three broad categories.

The first category is cryptocurrencies, which generally use their own blockchain.

The second category is cyber-indexed tokens, which include non-fungible tokens—in other words, digital assets that represent real objects such as art, music and videos—tokens that refer to currency or currencies, commodities or other digital assets, and the so-called tokens representing rights, such as investors' rights in a joint venture, which are then securities.

The third category is utility tokens, which have a specific purpose. For example, they may be used in the future on a platform in exchange for a special service or to receive preferential treatment for certain services on that platform.

As we have seen, there are assets that are tied to this technology. The people involved are issuers, holders and intermediaries of digital assets, or digital asset service “providers”, as the European Union has decided to call them.

In Canada, FINTRAC and the securities regulators were the first to publish their views on the application of the laws and regulations under their purview in order to establish their jurisdiction over certain digital assets. It is worth noting that, in doing so, securities regulators have used some interpretive capacity in securities legislation.

They have introduced a novel concept of a cryptoasset contract, which is based on the idea of the immediate non-transfer of ownership, which they believe makes the agreement an investment contract and, therefore, a security. Thus, certain issuers, intermediaries or holders of certain digital assets are now subject to securities distribution regulation. Later, my colleague Mr. Burgoyne will elaborate on the resulting problems. Based on our observations, players in this market could benefit from more legal clarity, consultation and cooperation.

We are fortunate to be able to observe what is being done in other countries. Within the European Union, countries have chosen to have specific regulations for each category of cryptoassets, which I described earlier. These countries wanted to pay particular attention to stable cryptocurrency backed by the euro. They decided to exclude non-fungible tokens from this regulation and regulate them differently, and to create a regime for cryptoasset service “providers”. Certainly, in doing so, they have provided some legal clarity, but it brings with it a lot of issues worth considering, given what is happening right now in the European Union.

In contrast, in the U.S., we are seeing a multitude of projects and initiatives being taken in a competitive climate as to the relevant jurisdiction, and there is a great deal of uncertainty among market players. This fosters the emergence of mega-competitors for our Canadian players.

As a final word, I would like to point out that, when looking at a blockchain, attention should be paid to the governance structure of the blockchain in question. This aspect is too rarely discussed and it would be relevant to pay attention to it.

Thank you for the opportunity to discuss this with you. I hope my presentation has been helpful to you.

I am now available for questions.

[The Chair, Liberal, Joël Lightbound]

Mrs. Fouin, it is a pleasure to see you again in this context, 10 years after the École du Barreau, in Montreal.

Thank you for your presentation and for starting this study off.

Mr. Burgoyne, you have the floor for five minutes.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I have a point of order, Mr. Chair.

I see that some people on the panel don't have headsets. In case they want to ask any questions, I wanted to make sure they have headsets.

[The Chair, Liberal, Joël Lightbound]

That is an important reminder, Mr. Généreux. I see that it is indeed the case.

Of course, all parliamentarians present, as well as witnesses, are asked to have their headphones and microphones in good order.

Mr. Burgoyne, you have the floor.

[Matthew Burgoyne, Co-Chair Digital Assets and Blockchain, Osler, Hoskin & Harcourt LLP, As an Individual]

Thank you.

I'm Matthew Burgoyne, partner and co-chair of the digital assets and blockchain group at Osler, Hoskin & Harcourt. I'm in our Calgary office.

It's a pleasure to be here. Thank you very much, committee members, for asking me to come to be a witness today.

While blockchain has a wide application in many different industries—supply chain management, health care, oil and gas, manufacturing, real estate and other industries—cryptocurrency is also crucially important. To date, I believe that Bitcoin is the best example we have of a fully developed, decentralized and well-functioning blockchain network. Blockchain is important, but cryptocurrencies like bitcoin and ether are also important and are increasingly playing a more significant role in business transactions, investments and other digital financial transactions.

The following are some of the rationales behind why companies are testing and adopting cryptocurrencies in Canada.

First, crypto could enable access to a tech-savvy customer base that values transparency in transactions.

Payments in cross-border transactions—for example, the acquisition of goods and services, paying foreign contractors and paying foreign employees—could be made using crypto in a matter of seconds, versus waiting sometimes up to a week to settle cross-border transactions with bank wires. Crypto could enable access to new capital and liquidity pools via the tokenization of traditional investments.

Many of my clients—which include entrepreneurs, medium-sized businesses and some larger businesses—in the crypto and blockchain space face enormous challenges. These challenges include lack of access to basic banking services, lack of access to insurance products, a difficult labour market and high regulatory compliance costs, mainly in securities law compliance.

Access to banking is especially burdensome for Canadian entrepreneurs in the space. Canadian entrepreneurs who otherwise comply with regulation and raise significant investment from Canadian investors are being denied basic business banking and chequing accounts quite regularly. The reason being given by Canada's banks is that crypto is too risky and the compliance costs related to anti-money-laundering and counterterrorist financing regulations do not make it economically feasible to provide banking services to crypto companies, save only for the largest companies. This puts small business owners at a disadvantage and puts Canadian businesses in general at a disadvantage when compared to international and mainly U.S.-based crypto companies, which have easier access to banking.

Insurance is another difficult product to obtain. My clients are forced to obtain policies from offshore or foreign insurance providers, sometimes at astronomical premiums and rates. There is a perception that crypto is still high risk, when the reality is that most crypto companies in Canada are registered with multiple regulators and are arguably more regulated than businesses in other industries.

Compliance costs related to securities law, including the costs associated with complying with recent Canadian Securities Administrators staff notices, can run companies millions of dollars in legal fees per year. Also, compliance with Canadian securities legislation substantially limits the product offerings that Canadian crypto asset trading platforms can provide to Canadians, which puts the Canadian platforms at a competitive disadvantage when compared to foreign-based crypto asset trading platforms.

The Canadian Securities Administrators and IIROC have tried their best to protect the public, and they are operating under trying circumstances. However, there has been a lack of consultation by the regulators with industry when it comes to cryptocurrency law and policy, especially when it comes to securities legislation.

By some estimates, the global cryptocurrency market is worth almost $900 billion. In 2019, the Canadian Securities Administrators and IIROC published joint CSA/IIROC consultation paper 21-402, “Proposed Framework for Crypto-Asset Trading Platforms”. A lot has changed in the industry since 2019, including new technological developments and a lot of new industry participants. For an industry of this size, we should expect to see more than one consultation paper, which only had roughly 50 responses. When compared with other novel securities-like products, such as derivatives and contracts for difference—products that have substantially lower market popularity—there has been virtually no consultation with the Canadian crypto industry.

One concern I've heard from clients is that the law is effectively being made via private orders and terms and conditions imposed on private companies, with the terms and conditions unique to a particular crypto company and not applying to every single company in every circumstance.

This is not an appropriate way to legislate a fast-growing industry in Canada. There needs to be more consultation with the public on how proposed policies might affect Canadian businesses in the space in a burgeoning global industry with more transparency into how regulators are developing policy and what policy concerns are being addressed. There are instances where existing law isn't best suited to regulate certain crypto products, such as fiat-anchored stablecoins.

Finally, Canada is at risk of lagging behind other developed countries when it comes to digital finance. For example, for the second time in a row, Payments Canada has delayed the launch of the Real-Time Rail payment system, as it was first announced to be delivered in 2022 and was then rescheduled to launch in mid-2023. No revised timeline has been given by Payments Canada as part of its most recent delay announcement. Similarly, the open banking system has been delayed until 2023, putting Canada and Canadians at a disadvantage.

Thank you for your time.

That concludes my written submission.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Burgoyne.

We'll move to Pascal St.-Jean. The floor is yours for five minutes.

[Pascal St-Jean, President, 3iQ Corporation]

Thanks, everyone. I'll be happy to answer questions in English or French.

My name is Pascal St-Jean. I am the president of 3iQ Corporation. We are a digital asset manager. We were the first to bring a fully regulated crypto product, spot bitcoin, an Ethereum product, globally through the regulating process. We believe that this industry should be regulated in the right way to protect investors. Our mission is to make crypto safe and secure and easy for investors across Canada.

A lot of my colleagues at Osler—not colleagues, but friends—had talked about a lot of the challenges in the industry, which I will repeat in a little bit, but I'd like to frame this a little bit more in terms of stories of actual Canadian citizens, particularly friends and family, and how this industry is impacting them. I think, in the end, what we're trying to do here is not only help industry but help Canada and our citizens across the nation, as well as our businesses.

I'll share a story of my parents, who grew up in northern Ontario and started a very small business in the early 1980s. During that time, as small business owners they were out of reach of real estate and out of reach of accredited investors, solutions that today are mostly very sophisticated investment products available for individuals who meet certain standards. They had no access to necessary capital or to debt to scale their business, and at the same time were poorly advised personally on their investments.

Fast-forward 40-plus years. They were in a spot, and it didn't look like retirement was ever possible. Thanks to these new industries and our products, which were launched actually before I joined the company, my parents were able to invest in this new emerging asset class, which gave them the ability to take their retirement last year. It was quite an amazing piece of news from that perspective.

Why I'm sharing this story, though, is that Canadians need access and need clarity.

Fast-forward to today. I'm seeing more and more similar stories for our younger generations, people in their twenties and thirties asking us all the time how to gain access to assets and how to move forward in life in terms of being able to grow financially. We know for a fact that wage earners are behind in Canada, not keeping up with inflation, not keeping up with the cost of living. On the flip side, asset owners—people who own businesses and real estate and other types of asset classes—are getting richer. The reality is that we need to create technology that will simplify asset ownership and fractionalize asset ownership. That's the power blockchain could bring to multiple industries, not just cryptocurrencies, which I'll be happy to talk about moving forward.

From our perspective, we're seeing that the solution is less about distribution of wealth and more about empowerment of wealth. That comes through blockchain technology. We believe that blockchain is not going anywhere. It's here to stay. The question becomes one of which countries want to participate and utilize this new industry and this emerging asset class to help grow their economies.

We believe that Canada has seen a head start in certain areas. There are banking challenges. There are insurance challenges. From our industry, from the finance side, we were able to get a head start globally. We are seeing that becoming more and more difficult as regulation is not being clear. As my friends at Osler were saying, our compliance costs, our legal costs, are very high, because we are educating the regulators. We are educating everyone we work with. Again, we're doing so because we want to be fully regulated and bring safe, secure products to the market.

From our perspective, our analysis of the benefits for Canada are job creation and talent retention. Last year we saw billions of dollars globally, from a venture capital perspective, enter the space, the fastest-growing investment space globally, and a lot of talent—engineers, mathematicians, scientists, as well as marketers and many other types of roles—is going into the blockchain space. We either keep the talent here or it will go somewhere else. There will be a brain drain if we do not act.

Global investment is knocking at the door. It's holding off, though. It's waiting for clarity. With Canada's being a G7 nation, if regulation becomes clear and a clear road map becomes present, we will see billions of dollars entering the ecosystem, both as underlying asset investments and as new capital for industry.

I also believe we need diversification of our economy. Being able to take charge and take the lead globally on blockchain will allow us to do just that.

From that, if we have clarity in regulation and allow the economy or the industry to boom in Canada, the digital economy itself will give wage earners the ability to participate in the digital economy, whether as asset owners or as participants in this new space. Fractionalization of ownership, whether it is of cryptocurrency, real estate, fine art or other assets, will enable Canadians across the country to have a small piece of assets to help them grow their net worth as they try to build a life for themselves across Canada.

These are the opportunities we see, including access to debt and to capital and to financing through peer-to-peer networks and through decentralized finance. There are a lot of opportunities across the board for businesses, for citizens and for commerce coming here.

With that said, I look forward to talking about some of these stories and the technology behind this. I have tons of examples of companies we've invested in, such as Neoflow and Stablecorp, bringing cross-border payments for businesses, enabling blockchain for the oil and gas industry and saving hundreds of millions of dollars in that process.

I look forward to your questions.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. St‑Jean.

Finally, I will now turn the floor over to Ms. Osowska.

[Justyna Osowska, Founder, Women in Blockchain Canada]

Thank you, Mr. Chair.

Thank you to the committee members for having me here today to represent Women in Blockchain Canada.

The corporation has been federally incorporated since 2018. We have been doing workshops around blockchain education. Really, in order for us to move anywhere, people need to know what blockchain is, how it works and what the use cases are. Specifically, the mission of the organization is to inspire women to become involved in blockchain technology. There are various studies that confirm that women are under-represented in blockchain technology.

Furthermore, to add to what other people have said, 15% of Canadians are underbanked, so definitely the financial sector is a place where there could be regulation to help people have access, especially those who are under-represented.

Basically, I started with blockchain technology because I come from an immigrant background and I was having a conversation with another person who's an immigrant about sending money abroad. Using the current financial system is difficult and expensive, and the reality is that it takes a long time for things to be authenticated.

A lot of other people have also mentioned NFTs, insurance and the banking sector, so I will just add to that. One of the biggest industries in Canada is real estate. You can use blockchain to do title searches, for example, which makes it much cheaper and much less expensive, and you can authenticate on the blockchain. Another use case can be authentication of documents. That's just to add to what everybody else has already said.

What I would really like to focus on is the fact that in order to create regulation, there needs to be education around this space. People need to know what is really happening, and that's really the mission behind the organization.

In closing, I would like to suggest to committee members that they look at how we can include people at different economic levels in the space. Specifically, I offer accommodation for consultation strategies to be developed to reach the under-represented groups.

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

I thank all of our witnesses.

We are ready to go to questions without further ado.

Mr. Lobb, you have the floor for six minutes.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Thank you, Mr. Chair. Congratulations on this important study for the committee.

The first question is for the group at Osler. I've heard many times through the last couple of years that we need to look at the regulatory burden around innovation around blockchain. My question to you is whether you have identified two or three pieces of low-hanging fruit the government could help with to deal with regulation or deal with clarity to allow this sector to continue to grow and create jobs in Canada.

Either Laure or Matthew, take it away.

[Laure Fouin, Co-Chair Digital Assets and Blockchain, Osler, Hoskin & Harcourt LLP, As an Individual]

Okay, I'll begin and then I'll let Matthew develop it and further expand on this.

I think one of the issues you as the federal government will encounter is the fact that until now it's been regulated under securities laws and regulations, which I think Matthew explained quite properly during his presentation. To me, one thing we should be looking at is which products are currently under this purview that maybe eventually should not be, because we are talking about currencies and your jurisdiction of money.

Matthew, I know you have a lot to say about that, so I'll leave it to you.

[Matthew Burgoyne]

Thanks, Laure.

There are Canadian dollar-anchored stablecoins, just to use an example. It's a digital token that's anchored one for one with the Canadian dollar. In various discussions we've had with provincial securities regulators, they've expressed a concern, and they've taken a position that these Canadian dollar-anchored stablecoins, to use an example, are securities and should be regulated as securities.

The practical use and the intent is to use these tokens like currency, like the Canadian dollar. The question becomes whether it is appropriate to regulate these tokens under the regime of securities legislation and policy, when no one's really buying these Canadian dollar-anchored stablecoins with the expectation that they're going to increase in value. It's not like a traditional investment.

Slotting them into securities law has been a little awkward for at least one of my clients. It's caused a lot of legal fees and discussion back and forth with exactly how the stable token is going to be sold. The effect is that it's going to be very hard for clients to actually do business and to offer these types of products, because the securities law just doesn't quite fit. It's probably more appropriate that they be regulated like a currency, and perhaps be regulated under a different regulator like the Bank of Canada or another regulator, because they're more akin to a currency than a security. That's one example, the fiat-backed stablecoin.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Mr. St-Jean, in the research you've done at 3iQ, and just in your own personal research, what are some of the most promising areas that blockchain.... We've talked about digital assets and we've talked about the transfers of money, etc., but what are some other areas that you see as some of the most promising areas that blockchain technology will deliver for Canadians in innovation?

[Pascal St-Jean]

It's a very broad question to be answered, but I want to separate it. I always teach that blockchain, decentralization and cryptocurrency are three different things that together make use of a lot of what we're seeing today.

Blockchain technology is the database ecosystem. For example, there's a company that we've invested in called Neoflow. It does blockchain technology for oil and gas. There is no currency associated to it. It is not decentralized. It is not meant to be a global network; it is meant to be a very niche network. However, that blockchain technology itself, in the way that they studied the supply chain and how it works with oil and gas, saved hundreds of millions of dollars in efficiencies and thousands of hours. That's the blockchain technology. There are many applications in supply chain, forestry and oil and gas in traditional space.

Then there's the financialization, or the peer-to-peer aspect. For example, I've seen this. It's a very early-stage idea, but I thought very innovative, of enabling peer-to-peer financing for down payments on mortgages for new families. Many people can potentially get financing from the bank, but they need the down payment. They don't know where to get it. Mom and dad don't have it and family doesn't have it, so how do we pull together in a way that is regulated, that is fully tracked on the blockchain, and that is governed by smart contracts? That is one of the ways that we are also seeing some interesting ideas that can empower citizens.

Basically, there's a financing side and there's the blockchain technology application. They are two different things.

Then there's the distributed aspect, which is the ability to say that no one central organization or entity owns the rights to it, and that brings a lot of global innovation.

I could go on and on, but I wanted to give two clear examples. Blockchain, crypto, and decentralization are not the same, and we all need to understand that at a fundamental and technological level so that we can regulate things differently.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Can I ask one last question, or am I out of time?

[The Chair, Liberal, Joël Lightbound]

You can have a very brief question and a very brief answer.

[Ben Lobb, Conservative, Huron—Bruce, ON]

Justyna, we were at a similar conference in Toronto this summer, and I watched the segment you spoke at. What struck me was the number of young people. I hate to say it, but I think I was one of the oldest guys there.

Can you just talk about the youth and the intelligence that's entering this sector, and how important it is going to be for the future of Canada?

[Justyna Osowska]

I absolutely think that it's going to be a transformative technology across various sectors, so it's imperative for Canada to be a first mover.

I would like to acknowledge that Canada's work has already happened. We were the country that issued the first Bitcoin ETF, followed by an Ethereum ETF. Canada has regulated exchanges. It's just amazing the work that has already been done, but we have to continue that, because this is a very fast-paced industry. We were talking about how it's across so many sectors. It really comes down to innovation.

Blockchain is a ledger, but what it's doing is allowing for better transparency, authentication and all these things. As you said, all those young people.... They did a survey in the U.S., and 43% of youth would like to invest their retirement funds in this, so people are looking for the future. The young are looking into the future, into this technology, and all the things that it can do.

My recommendation is that Canada as a nation should do more research on what can be done and how we can move forward to have regulations that also allow business to work very well.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

We'll move to MP Lapointe.

[Viviane LaPointe, Liberal, Sudbury, ON]

Thank you.

Ms. Osowska, it sounds like your not-for-profit does a lot of really good work in supporting women in science and technology, engineering and mathematics.

I come from Sudbury, which is a global mining centre, and we have done a lot to promote engineering and science careers for young women. I'd be interested in knowing from you what diversity and inclusion looks like in this area. What kind of support are you seeing available to encourage that?

[Justyna Osowska]

Thank you for the question.

I think there is currently support in the area, whether it's private or public. I personally have worked at accelerators in both Ottawa and Montreal. I've worked with InvestOttawa to host workshops, and they provided me with the space, and also in Montreal with Bonjour Montréal.

I think currently there could be more of that done, especially when it comes to financial education inclusion. I think there could be more research done on that as well, because women are under-represented in that space, and we need to find out more about how to get them in.

I know Ontario did a study on women in STEM, and I think things could be looked at in that study and taken into blockchain and used to bring more women in, especially in advertising, for example. Women are more interested in social impact than they are in just making money.

As I was saying, the government could look at implementing different strategies to make the space more inclusive and equitable.

[Viviane LaPointe, Liberal, Sudbury, ON]

We know we've seen a big increase in promoting STEM to women and girls, minorities, and those who have traditionally not been represented in these fields. Can you tell us what the industry and the different levels of government can do, and keep doing, to promote and support the blockchain industry, tech and STEM more generally to ensure that we have an industry that represents the diversity of our country?

[Justyna Osowska]

I mentioned the research, but also in addition to that there's education. I think women and girls need to see this—she has “to see it to be it”—so we need role models. It's not good enough to say we need to have this done; people need to see women who are actually succeeding in the field and are being shown that these are potential careers for them, that there's potential work for them. There are potential mentorship programs. I think that could be another thing to use to encourage women to get into the space.