Industry Committee on Nov. 21st, 2022

[Aidan Hyman]

Maybe I can jump in here. I can share an article that we just released on post-quantum consensus mechanisms, which really are kind of the place of fear within the blockchain stack, and how we as a community aimed to solve these problems and have already solved these problems.

I would venture to say that this isn't really an issue in that it's already solved. I will make sure my team shares with your office the article in which we talk about how we achieved what we call post-quantum cryptographic guarantees.

[Han Dong, Liberal, Don Valley North, ON]

Thank you, Chair.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

Mr. Hyman, if you could please send that to the clerk of the committee, I think members would be interested in learning more about this.

I'm now giving the floor to Mr. Trudel for six minutes.

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

Thank you, Mr. Chair.

Thank you to all the witnesses. What I've heard this morning is very interesting. There are still many points that remain unclear, and so we're going to try to shed a little light on them.

Mr. Mosoff, you've often said in the media that the cryptocurrency industry is not a wild west that could be tamed without appropriate regulation. You believe that the industry and the organizations that regulate this new financial system need to work together. There's some cleaning up to do here.

Can you specify what in particular is needed to modernize this industry's regulatory framework?

[Brian Mosoff]

Thank you for the question.

I think many joining us today would talk about us having a fragmented securities regulatory environment. I think it's important to understand that retail investors—and I'm going to talk about them specifically for a moment—don't think of things as commodities or securities. They don't bucket the world that way. We might in this room, and lawyers may, and accountants may, but retail investors are seeking an access point to purchase an asset or participate in an activity that they think may be very important and perhaps bring a financial gain. They don't think about what platforms are regulated. Perhaps there will be more of a light shone on that now, in a post-FTX world.

Generally, what this means is that if a local platform is not able to compete with one in a foreign jurisdiction that has less oversight and can offer more products and services that are keeping up with industry trends, that retail investor will seek out the foreign platform regardless of whether there's a local registration or not.

Something that I'm very passionate about would be to figure out a way to allow the local businesses that are trying to be compliant, that want to be registered and that are trying to keep up with the industry to offer those same products and services. If we can build a framework that allows them to keep pace, I think we won't have retail-investor assets moving into foreign jurisdictions.

That, I think, is the biggest help that we need from government. It's to have a national framework, a national strategy on how we see this technology playing out at a retail-asset exposure level, and also how, as a technology, it's going to touch society.

I'd ask Mr. Thomas if he has anything else he'd like to add to that.

[Evan Thomas]

Thank you.

There's one thing I would add that is specifically within what the federal government can do to protect Canadians in this area. As Mr. Garetson and I mentioned, crypto trading platforms like ours must keep our clients' crypto assets with custodians. These custodians are themselves regulated, and they are trust companies or banks. They have to have sufficient capital and they have to have procedures for keeping crypto assets secure.

In Canada, regulation of those sorts of entities would fall under OSFI or provincial trust regulators. At present, there's actually only one custodian in all of Canada that meets the requirements under Canadian securities laws, and then there are other custodians that have the technology but do not yet have the regulatory piece. That is, they're not trust companies or banks.

One opportunity at the federal level is for greater openness to developing the crypto asset custody market within Canada. It's a matter that would be overseen by OSFI at the federal level. Actually, last week OSFI did announce that it plans to study this area in the coming years.

Related to that would also be the area of insurance platforms like ourselves, which are required to have insurance for crypto assets. There's increasingly a demand for insurance for crypto asset businesses. Again, to my knowledge, there are no other Canadian insurance companies that will underwrite insurance in this area, but there is a significant demand, both within Canada and globally, for this type of insurance coverage. Again, both custody and insurance are important elements of protecting Canadian investors.

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

Thank you, gentlemen.

You said earlier that cryptocurrency was beginning to make headway in other countries. What do other countries do in terms of regulation? You mentioned the United States and Great Britain, which are currently two of the countries where a lot is happening in this area.

Is regulation more advanced in these countries? Can Canada learn from their experience and from the way they regulate the market?

[Evan Thomas]

If the question is directed to me, I can add a couple of comments.

The United States in some respects is more developed, and in some respects less developed. The United States does not have a consistent national framework for the regulation of crypto trading platforms of the kind we have in Canada. At the same time, for example, the State of New York has a regulatory framework for crypto businesses and crypto custodians, and the largest custodians in the world are predominantly located in New York. The experience of New York may be instructive to the committee in terms of considering different modes of regulation, particularly with respect to crypto-asset custody.

In Europe, the EU recently introduced a framework for regulation called MiCA, but it is yet to be implemented. The United Kingdom has been doing, I would say, more forward-looking work and has not yet introduced legislation, to my knowledge.

Again, Canada is ahead in many respects. There are opportunities to learn. New York and the EU might be instructive models for the committee's consideration.

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

Thank you.

How much time do I have left, Mr. Chair?

[The Chair, Liberal, Joël Lightbound]

You have just 12 seconds left.

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

All right. Thank you very much.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Trudel.

Mr. Masse has the floor now for six minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thank you to our witnesses for being here.

I have a general question to start off. I come from a manufacturing base, where we make things that are tangible and real. In terms of cryptocurrency and trading, aside from being a speculative asset, what practical things does it actually create for the economy, or is it entirely based on the shifting of the numbers?

[Aidan Hyman]

I'm happy to address that.

One of the things I mentioned during my speech was that the World Food Programme is leveraging blockchain technology to ensure that people are fed and that the misappropriation of funds cannot happen. This is a prime example of how blockchain technology can be used for a lot more than just shifting numbers. Yes, things are sent to a place, but then to utilize that technology when you are going to a food haul or something of that nature, there's a physical link there beyond just accounting in the back end.

Where we see an incredible shift in how we view Internet products and how blockchain will influence those is really in the data that underpins all of the these massively popular social networks. It's a reimagining of how these new applications can be reformed. Owning your own data is going to be crucial to seeing how we can grow beyond the Facebooks and the Instagrams of today.

It's incredibly important to look at this technology as the spine or the plumbing that will inevitably lead to a more user-owned Internet. Is that very obvious right now? Unless you're inside of it, it might be hard, but hopefully, after today, you'll all be on board with that vision of what we can do here in Canada for Web3.

[Brian Masse, NDP, Windsor West, ON]

I appreciate that.

What I'm concerned about is what is the 3% to 5% that's out there? You mentioned having to keep 80% to 95% in cold storage, so what is the other money doing? Where is it moving around and how is it physically affecting the economy? You did mention the food aid, but the currency didn't create that in terms of the product; it was shifted around.

What are the other percentages doing physically in the economy right now? Is it basically another version of the stock market at the end of the day, in the way that some critics would argue that the stock market is quite similar to a casino? It moves numbers around and so forth, but it actually doesn't produce anything.

What is the 3% to 5% that's out there on a daily basis that affects people's lives?

[Adam Garetson]

Maybe I can jump in. I think this entails some of my previous comments.

A good way to consider it conceptually is to think about the underlying blockchain technology and then use cases that can be built on top of it. For traditional industry, you may want to use blockchain to replace your additional system of books and records, for example. It's safer, it's more secure and you can replace traditional infrastructure with blockchain.

One of the use cases that gets built on top of blockchain that primarily impacts the financial services sector is rapid movement of funds and currency. You can do things like instantaneous settlement between counterparties and not have to have money sitting overnight in a financial services system. Therefore, you reduce the risk of counterparty credit failures, failed trades and money movements and things like that.

Another use case that's been built on top is essentially equivalent to an exchange, a marketplace or a stock market for the trading of digital assets. One of the comments I was making a bit earlier is to consider the technology along that particular spectrum and to identify areas for regulation that are responsive to the risk profiles.

Private companies using private blockchains that only people in the company can access to store their books and records and share them with the auditors probably don't need a ton of regulatory oversight. You probably don't care what system of records companies are using today anyway.

On the marketplace side, the jurisdiction has primarily fallen to the Ontario and Canadian securities regulators to apply more traditional securities laws on top, again with some additional gap legislation for those types of products.

In the middle, you have a bit of a spectrum. We're not entirely positive what use cases are going to rise to the top and which ones are going to fall, but one area that you can see at a federal level is the lending-type products. Those don't traditionally fall within the purview of securities regulators. Those are under more banking-type legislation.

My colleague Mr. Thomas was talking about insurance coverage and trust law. You're starting to see financial services cases that are more at the federal level.

To respond a bit more to the 3% to 5%—and I may throw it back to Mr. Hyman for more of a technological...or Mr. Mosoff, potentially—when you think about the exchange-traded business, the 3% to 5% is what's moving on exchange or between users at any given time or at any particular moment, for example—

[Brian Masse, NDP, Windsor West, ON]

What's that doing for the economy? In terms of that 3% to 5%, aside from speculative worth of the value of that trade, I wonder what it physically does for the economy.

It might be an oversimplified version, but I'm trying to distinguish this process from our financial systems. We have Money Marts and all kinds of different stuff like that, and payday lenders that are basically a drag on the economy. It's about borrowing and getting percentages from people. It doesn't really produce anything, other than just the access to capital and the insurance of making sure that those assets are going to be paid later on at a higher dividend at 20% or 25%.

That's what I'm trying to figure out. Where's the real value for people with what's being done during the day?

[Adam Garetson]

I understand. I think one of my colleagues may be better positioned to answer that.

Mr. Mosoff, I was thinking the committee might benefit from—

[Brian Mosoff]

Yes. I believe we're almost out of—

[Adam Garetson]

Yes, exactly. Great.

[Brian Mosoff]

I know you're bumped up against time, but the short answer is that in the long term, we believe that there's going to be very important activity that takes place on these open networks. The question is going to be who owns the tokens that verify, validate and secure all of that activity and those transactions.

You are 100% right that right now, we are in a very speculative part of the cycle. It's people betting that the size of that economy and that activity is many trillions of dollars, and that owning those underpinning tokens and the ability to offer security out to those networks is potentially very valuable.

That's where we are in the journey.

[Aidan Hyman]

I'll step in there really quickly. My organization does take part in speculation. We are a technology company that builds open-source developer tools that empower people to build things, like the people on this call today. They might be using our open-source developer tools under the hood.

I would definitely—and I will share this with the rest of the committee—love to point you to things like Gitcoin that are enabling hundreds of millions of dollars in funding to public common goods, all on the Ethereum blockchain.

I'll point you to different regenerative technologies built on top of Ethereum that are directly contributing to creating a better world and regenerating our planet. There are some incredible use cases that we're seeing today built on top of Ethereum that absolutely do a lot more than just pure speculation. I would go so far as to say that I wouldn't be here speaking to you today if speculation was the be-all and end-all for this space.

When we joined this journey, it was specifically to restructure the fundamentals of the Internet. For most of the people in the early days, that was really their intention. It was never about how we make it easier to speculate on the stock market.

Obviously, the financial tooling and the infrastructure that comes along with this technology is fundamentally applicable throughout industry, which speaks to some of the use cases that my colleagues mentioned with respect to quicker settlement, immediate settlement and trusted settlement through a property of trustlessness and not needing to trust centralized intermediaries when participating in speculation, if that is what you want to do.

[Brian Mosoff]

Do we have 30—

[The Chair, Liberal, Joël Lightbound]

Mr. Mosoff, I'm sorry. This was a very interesting discussion. I kind of lost control of time, and we'll have to end it there.

We'll move to Mr. Williams for five minutes.

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

Thank you, Mr. Chair.

Thank you to the witnesses.

I'm going to continue. This discussion is very important. I want to start at the top level, so we'll start at the top. We'll just start with whoever can answer these.

What is blockchain worth to Canada right now? We talk about its potential, but what is the industry worth in terms of jobs and GDP? Can anyone answer that for us to start with?