Industry Committee on Nov. 21st, 2022

[Brian Mosoff]

This is going to be fairly speculative, because I think it's very hard to quantify, but I would say that if you imagined Ethereum as a business that was created, it would be one of the largest that Canada has ever seen. The total value of that platform is many hundreds of billions of dollars. At its peak, I suppose it was around half a trillion dollars.

That was born here in Toronto. Most of the key developers have left our jurisdiction to go to other places, because they thought it would be easier to build there and create the opportunities beyond just creating the initial foundation of Ethereum. They would do that in the U.S. They would do that in Europe. They would do it anywhere that would welcome that activity.

In terms of the number of jobs, I can't speak to that. Maybe someone else wants to jump in here.

[Aidan Hyman]

Yes, absolutely.

A 2021 report by Electric Capital said that there are just under 20,000 full-time blockchain developers, with an additional 34,000 blockchain developers who are contributing on a part-time basis. In looking at those numbers, it is also important to appreciate that these are not traditional paying jobs; these are incredibly well-paying jobs with incredible benefits.

The more that we can do, as Mr. Mosoff was alluding to, from a regulatory standpoint to ensure that more businesses can be based here in Canada, the more I think it will lead to more new-found resurgence in all of those developers now choosing to come home—I mean, not all of them, not all 20,000 Canadians who left Canada.

[Brian Mosoff]

I would also add to that. When I think about the next generation, the people who are 15 to 20 years old today, they're inspired to work in this industry. They see it as a design canvas that is so wide, with a lot of interesting intellectual problems that need to be solved. How do you do on-chain insurance? How do you have file storage that exists on one of these networks?

They look at the Internet as something that is going to be re-created with this technology underpinning it. Even though today it's murky, they see the opportunity to build the next Googles and the next Amazons, and it's inside of this world. They're not going into traditional financial institutions. Of course, some people will, but I think it's important to recognize that to that group, to that cohort, the idea of more digitally native money—money that is perhaps created by an algorithm rather than a central bank in their jurisdiction—is going to be something that resonates with them. That's who is going make up this economy in the next five or 10 years.

[Ryan Williams, Conservative, Bay of Quinte, ON]

I think it's neat that it's called Web 3.0. It seems to be similar to what happened in the late eighties and early nineties with the Internet. Is this similar? Is this sort of the next iteration? Has our technology developed so much that this seems to be where this is going next?

[Brian Mosoff]

I'll just go quickly. I would add two points to this.

First, a lot of people will bucket the iteration of the web into three buckets. The first is Web 1.0, which was basically read-only. You're connecting directly to someone else's information. You're reading it, and that's it.

In Web 2.0, you have this rent-extraction model. You have the emergence of these big, centralized players, and you have read and write. Social networking becomes a thing, and file storage up in the cloud becomes possible. I would say that most people on this call, whether they're in favour of blockchain or skeptical of blockchain, don't like that world, where we've trusted these big corporate entities to house all of our data. We hope they do it in a secure way, that they won't rent-extract in the background, using that information for advertising or in ways that we don't approve of.

The movement towards Web 3.0 is this: Can we move back to a decentralized web that's more secure, where that end user is more in control of their data?

As I was mentioning earlier, when I think about Ethereum, it's that tech layer that underpins all of this activity, and that's the reason so many people want to speculate or purchase those tokens today. It's because they believe that this world is coming and that those new verticals—file storage, social networking—will emerge, and it will need this global layer of truth. It's not going to be a corporation or a central authority that underpins that activity and runs a database and says you can or can't do something. That one layer of truth is shaping up to be Ethereum.

The last point I'd quickly make is that I think of this like the 21st century invention of the mechanical clock. In the 14th century, the mechanical clock was emerging. It could have been the 13th century; I can't remember. The point is that you couldn't coordinate economic activity prior to this, let's say, for anything less than one hour. Maybe it was a half-day. When you had this mechanical clock and you could coordinate activity down to 15 minutes or to one minute, the amount of economic unlock that came from that was enormous.

What we're seeing now is the tech layer, the Internet layer, where you can coordinate a layer of truth of information, as people were saying, for settlement to replace things, let's say, like the DTCC, or how stocks are traded outside that world—commodities, tokenized real estate. If that can happen on one layer of truth in a very efficient way, that to me is like the 21st century invention of the mechanical clock. That's why a lot of people are really excited. It's because they see that this world is coming and that this technology is not going to be built by a corporation or a government; it's going to be built in an open source way that the entire world can plug in to.

[Ryan Williams, Conservative, Bay of Quinte, ON]

That's interesting.

Mr. Chair, speaking of clocks, I'm out of time. Thank you, sir.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Williams.

We will now move to Mr. Erskine-Smith for five minutes.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Thanks, Joël.

I want to start with bracketing blockchain from crypto for a moment, because Brian, I think your comments around the value of smart contracts and the economic activity that can be facilitated by blockchain are unquestionably true. We studied Estonia's KSI blockchain and digital ID in the last Parliament, and there's a huge economic value and savings in that regard.

Aidan, you mentioned the value of blockchain in relation to tracking international aid. There's obviously, unquestionably, the value of blockchain in tracking food supply chains and supply chains more broadly, but I guess the question around cryptocurrencies in particular is this: What value are they providing to society as against the volatility risk that we've seen with Terra?

Even if you want to bracket off FTX from this to say that's pure and outright fraud and they were making claims around FDIC protection that they didn't actually have a number of months ago, there are still concerns about the protection on a consumer basis.

All that is to say, let's bracket these conversations and put our focus specifically on cryptocurrencies. What value are they providing that isn't provided elsewhere, as against the risk that is being created for consumers?

[Brian Mosoff]

I would start by saying that you have to ask the question, “What is the definition of a blockchain?” This is perhaps a somewhat hotly debated topic.

My view is that a blockchain is a trust coordination mechanism, meaning if you have two counterparties that do trust one another, you probably don't need a blockchain. You could use a database such as MySQL or MongoDB. These are all excellent tools. You don't really need a blockchain.

A blockchain comes into play—again, this is my view, and some people may disagree—and is needed when you have counterparties that don't trust one another. The question is, what is the commodity or the asset that is being put at risk? In Bitcoin you have electricity and computing hardware being put at risk. The token that is rewarding them for their activity of being honest and secure, of being good actors, is bitcoin. It's a token that's native to that system.

In Ethereum now there's been a transition away from computing hardware and electricity, and people are moving that commodity from being external to the network to one that's internal, which is ether, the native token of Ethereum. The reason people want to buy those tokens is that they believe that these open blockchains—these databases for which you don't have to have counterparty risk and you don't have to trust anyone else—are going to be very valuable tools. They are purchasing those—

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Whoa; pause, pause, pause.

Take a token like Helium, which I understand to be contributing.... There's an incentive to add value to providing some of your network, contributing your network, and then there's value to having the token to then use the network. Then they are able to create a public good, a clear real-world public good, but if you're saying we're just creating these tokens in the hope that they get trusted down the road and there's going to be value, in what world does that make sense?

[Brian Mosoff]

I can't speak to Helium. I would ask someone else to jump in if they know that system.

Again, if you look at why Ethereum was created to be different from Bitcoin, you see it's trying to build a settlement layer for any asset or any activity. Those assets can be real-world tokenized dollars, real-world tokenized real estate or crypto-native activity like on-chain trading, which are self-referential to their own ecosystem or NFTs in the metaverse. The question is what underpins that system, and there you need a token.

Does someone want to jump in on Helium?

[Aidan Hyman]

Yes. I could speak to one point Mr. Mosoff made earlier. I might not be 15 years old, but I missed the previous Internet boom and was born into this world that really owned me. Everything on the Internet owns everything that I put onto the Internet. People like me who are trying to re-create these systems in a decentralized way, taking away the power of the centralized actors, are the reason these cryptocurrencies are necessary. It is the—

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

I understand, but hit pause there, Aidan. With that decentralization comes no central protection. What you end up with, in a case like Terra, is people losing their shirts. How do we have that decentralized model, that vision you have, while making sure people don't lose their shirts?

[Aidan Hyman]

Absolutely, and unfortunately the reality is that a lot of people on blockchain knew that Terra was an illegitimate alternative to something like MakerDAO, for instance, which is another decentralized stablecoin.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Pause yet again, Aidan, because if people knew I could have gone on Wealthsimple—or Adam, I could go on your crypto platform—and I could have bought Terra, presumably, yet Aidan's telling me that people knew it wasn't legitimate.

[Aidan Hyman]

I didn't say it wasn't legitimate; it wasn't as—

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Come on, though.

[Aidan Hyman]

—algorithmically backed as something else. That's why we need this study—

[Brian Mosoff]

If I could just chime in here—

[Aidan Hyman]

—and to educate people and work together, as we're doing today, and have more of these committees. The issue is we weren't talking. The issue is we weren't making our voices heard. What we need now is to honestly work together to create the regulation that empowers people to participate in this new Internet without taking away their opportunity to participate. We need to work together, in ways that we never have before, to ensure that things like Terra are caught ahead of time, that things like FTX are caught ahead of time.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

I agree.

I'm out of time. I would just say that I think you're right in saying we need to focus on regulation and protection. If there's a way of matching that regulation and protection with the vision of decentralization that you have, it's great. The core thing is this: How do we make sure we, as regulators, as legislators who want to protect the Canadian public, are differentiating between tokens that are adding value to society and pump-and-dump schemes? At the end of the day, there are too many of those around, and people are going to lose their shirts.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Erskine-Smith.

It's over to Mr. Trudel now.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Thank you, Mr. Chair.

This is all very interesting. However, I'd like to look at all this from a different standpoint.

Let's talk about combatting climate change. The Quebec government is placing a huge emphasis on the development of batteries for electric vehicles, for example. But we know that gathering data via the Internet uses a lot of energy.

I was wondering whether there were numbers on how the cryptocurrency industry behaves compared to the traditional banking system. Do we know whether it will require more energy? Are there numbers on this?

My question is not for anyone in particular. Are any of the witnesses willing to answer?

[Adam Garetson]

Sure. Why don't I jump in? I'll just say right off the bat that I don't have an answer for you today. I apologize.

I think one of the challenges with providing a true response to that question is with respect to disclosure. I analogize to the traditional securities world and publicly traded company disclosure-requirement regimes as they exist and as they are evolving. My understanding is that regulators, primarily securities regulators, are working to enhance ESG-related disclosures for public companies, and those laws, I understand, have yet to take effect and have yet to have meaningful impact. However, that is an example of traditional legislation with respect to disclosure—whether it's around an individual asset or a market intermediary—that will be helpful for this space.

We are emerging and developing, but I think of WonderFi Technologies as a public company. As and when there are ESG-related requirements for disclosure for our company, we will be adhering to those and giving disclosure to the world. That will theoretically be the case with traditional financial institutions in, hopefully, the near term as well, and that will allow for a more meaningful comparator.

I am not as close to the ins and outs of the technology as some of my colleagues here on the panel, but I understand that the industry is working quite hard to reduce its carbon footprint. I don't have a true comparator, but I believe that information is coming as the regulation develops.

[Brian Mosoff]

If I can add to that....

You've seen a shift in the two largest networks, Bitcoin and Ethereum. In Bitcoin mining, which uses electricity and computing hardware to validate the network, they are essentially arbing the cost of electricity. That's the simple way of thinking about what they are doing. There is an incentive to co-locate that activity next to renewables using cleaner sources of energy. What the percentages of that network are, I can't speak to at this time, but I know that they are incentivized just through economic forces to do so.

Ethereum, the second-largest digital asset by market cap, has transitioned away from proof of work to something called proof of stake and has reduced its energy footprint by over 99.9% because there is no more electricity in computing hardware, a commodity external to the network, being put at risk. Instead, it's the native token.

These things are moving toward greener solutions. Can they continue to get better? They can, 100%.

I also think it's important to think about every activity we do in society as something that consumes energy. When people say to me, “Don't you find some of these activities wasteful?” I ask them if they believe in watering lawns for people to go on a golf course, or turning on Christmas tree lights during the holiday time. Everything uses energy. The question is whether we think it's a good use of our energy.

The reason to be excited about these blockchains or blockchain technology is that we think a global settlement layer, a global financial system that's not run on corporate servers in a specific jurisdiction, is something that is very valuable. It's something that we can debate. People will have different opinions, but to me, that's the way to frame this question. Everything consumes energy. It's a question of whether we think this is a good use of a limited resource that we have as a society.