Industry Committee on Nov. 24th, 2022

[Patrick Mandic]

I'm not familiar with the contents of the bill, but what I can tell you from the blockchain perspective is that it's all about the best practices you are using. You would never put PII, personal identifiable information, on a blockchain. You use it only for cryptographical proofs about that data.

In principle, if you use it correctly, there should not be any problem with respect to privacy.

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

You talked about identification. When there is data on the blockchain, is it de-identified, or is it anonymized?

[Patrick Mandic]

Data on the blockchain is never related to a specific individual or organization. We call it a hash. It's essentially just a proof.

That's how you should operate. You should never be able to know specifically to what piece of data that proof belongs, unless I provide it to you for verification.

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

This is my last question, Mr. Chair.

Would this be very secure? Is blockchain the most secure technology we could have, among all the other types of technology that are out there right now?

[Patrick Mandic]

This is the most secure that we know, right now.

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

Thank you very much.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

We'll now go to Mr. Fillmore for six minutes.

[Andy Fillmore, Liberal, Halifax, NS]

Thank you very much, Mr. Chair, and thanks to the witnesses, present and virtual, for your time and thoughts today.

I thank you, Mr. Amiouny, for your reminder that it's a new technology and that it takes time for the world to come along. Even so—I want to focus on crypto—it appears that there are credibility and trust challenges that are significant.

John Ray, who was the CEO of Enron during its famous and dramatic liquidation, says that in the 40 years of his career, he's never seen anything as bad as FTX. He says he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

In fact, people lost over $2 trillion from crypto in the past year. Bitcoin went from $68,000 to $21,000. We have some colleagues in the House of Commons suggesting that Bitcoin could be used to opt out of inflation by putting savings into such a volatile currency. It seems very irresponsible.

I want to direct my questions, if I could, to the consortium and NDAX.

How is it that you think Canadians can trust cryptocurrency, when the second-largest exchange was essentially a fraud operation that collapsed within days?

What are your thoughts on the current state of the credibility of the industry?

[Koleya Karringten]

I would like to start by saying that FTX is fraudulent. They don't represent the Canadian cryptocurrency industry. They don't represent any of the exchanges we currently have in Canada. They had poor governance and were fraudulent from the get-go.

It would be good to separate that there are fraudulent entities such as Enron, as you stated, out there, and then there are good actors working towards clear regulation. The cryptocurrency industry, especially in Canada, has members like NDAX and others that have been working very closely with regulators.

There were failings of groups like Quadriga and the Einstein Exchange in Canada. This happened many years ago. Based on that, our Canadian regulators came in and we have been working very closely with them, law enforcement, IIROC and OSFI for years to not only make sure that Canada has the strongest regulations, but that we have safeguarded and made sure that consumers are protected.

While I cannot speak for other jurisdictions, I would say that Canada's very stringent and strict regulations are somewhat difficult for this industry to be able to navigate. However, because we had failings like that happen very early in the Canadian space, it would be extremely unlikely that an incident like FTX could happen in Canada again.

[Andy Fillmore, Liberal, Halifax, NS]

I'm going to reserve two minutes at the end for another question.

Mr. Rasul, can you answer, please?

[Tanim Rasul]

I would echo everything that Koleya said.

Because of the QuadrigaCX debacle in 2019, regulators were forced to ensure that Canadian cryptocurrency trading platforms had safeguards for client assets.

That's why in my opening statement I mentioned that we're the only Canadian CTP that has its SOC 2 type II certification. This is an audit by an accounting firm on an organization's internal control framework and a test of those frameworks. We have a financial statement audit by a Canadian panel auditor. We also have to do monthly financial reports and form 1 reports to IIROC, disclosing our risk-adjusted capital and any working capital requirement triggers that happen.

[Andy Fillmore, Liberal, Halifax, NS]

Thanks for that.

I'm going to switch gears a bit. Again, for the consortium and NDAX, I want to talk about the role of government here.

What's your sense of what Estonia has done, which is essentially develop that trust and that credibility from a central government body, like a digital currency backed by the Bank of Canada, for example, as opposed to the decentralized...what some might call the Wild West? I know it's coming together in a more coherent way, but what's your reaction to that?

[Koleya Karringten]

I would strongly encourage government and regulator engagement with our industry. I know that our industry is very eager to engage with our government for that one.

The reason companies or individuals will go towards the centralized exchanges is based on not being able to access the basic business needs that this industry requires. Banking is difficult for these businesses, and if you can't get access to something as simple as banking to be able to operate a compliant business, you're more likely to go offshore.

With companies that feel it's too difficult to navigate the regulatory environment, we've also seen that they'll go to offshore places like the Bahamas, like FTX did, to what I guess are more lax—for lack of a better word—regulatory jurisdictions, where they can operate decentralized exchanges and consumers aren't protected.

In Canada, with our members, we would like to see government get engaged. We would like to see government advocate for better access to banking and for very clear regulatory processes to allow for these companies to make sure they are registered with IIROC and FINTRAC and can serve Canadians in a safe and compliant manner.

[Andy Fillmore, Liberal, Halifax, NS]

Thanks.

Go ahead, Mr. Rasul.

[Tanim Rasul]

For CBDCs, central banks around the world are understanding the benefits of how they can bring the dollar onto the blockchain. With the popularity of crypto and stable coins, they really see that money needs to evolve. CBDC transactions can speed up and secure payments between people and institutions, banks and businesses. It can be convertible, low-cost, secure, flexible and scalable.

This has to be done with participation between industry and Canadian citizens and the Bank of Canada. As early as 2018, we spoke to the Bank of Canada about CBDCs, and we continue to engage with the Bank of Canada to help in any way we can to understand the CBDC space.

[Andy Fillmore, Liberal, Halifax, NS]

Thank you, all.

I'll end on a positive note, if there are 30 seconds left.

Maybe it's a question for Beatdapp. What are some of the success stories, where blockchain is bringing value, and the positive side of all this?

[Morgan Hayduk]

Andrew, do you want that one?

[Andrew Batey, Co-Chief Executive Officer, Beatdapp Software Inc.]

Well, on a personal note, I've managed crypto through three downturns, so this is my fourth experience. In 2018, my portfolio was down 90% and everyone was saying, “Sell, sell, sell—you've lost all this money.” I didn't actually lose, because I didn't sell, and when I rebalanced as the next bull run came, I was up 900%.

I know that wasn't your question, but I think part of the answer is knowing what the market does, just like anyone who's trading in a sophisticated way or investing, and knowing when you should pull and when you should double down. I'd say it's materially changed my life in a positive way, having managed Bitcoin since 2011.

On the practical application side, one of the most amazing things we see is how it affects drugs and pharmacies in making sure the authenticity of drugs is correct, or in the DoD context: Where is the supply coming from? Are the manufacturers actually delivering the correct parts and goods? If something malfunctions, where are all the other parts that need to be replaced immediately? That has no actual cryptocurrency impact and no consumer application, but it can transform an entire sector in a positive way and save lives.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

Mr. Trudel is next for six minutes.

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

Thank you, Mr. Chair.

Ladies and gentlemen, thank you very much for being with us. The discussion is really very interesting.

Mr. Hayduk, I'd like to follow up on a question that was asked earlier about music streaming. I'm talking about Spotify, Apple Music and Amazon Music Prime.

We know that, for songwriters and artists who make music, it's a big challenge to get royalties commensurate with their work. Bill C‑11 was passed in the House of Commons, which should help.

Practically speaking, how can blockchain technology help the system so that artists get all the royalties they're entitled to?

[Morgan Hayduk]

It's a great question.

From our perspective, the first step is just getting the accounting right and being correct about adjudicating what is and is not legitimate listening.

I talked to you in the opening statement about how a considerable percentage of streaming activity is subject to manipulation by fraud. Eliminating that from the system is the first step to making sure that every artist who is trying to earn a living with their music or through their art is getting paid correctly.

This is sort of a boring enterprise application of blockchain, but I think that might be a different story than is often told. It's something as simple as just getting the accounts right. Having both parties agree is a really critical part of making sure everyone downstream from the service itself is paid correctly. Then adjudicating for fraud is another really important, very boring part that's almost imperceptible to most consumers but affects the pocketbooks of the artists who are paid.

That's where I would start. I think the platforms themselves work really hard on this. The independent and major labels care deeply about it, obviously, as it's their business. Independent artists and all the folks who make a living in music but aren't the musicians themselves, care deeply about us getting this stuff right, too.

The animating ethos of our business is getting the foundational accounting right, so that everyone who's doing things the right way is paid correctly.

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

Thank you.

Are there any other applications?

We know that there's a lot of fraud on Twitter, Instagram and Facebook. It's a huge problem. Could blockchain and the technologies we're talking about today help to thwart fake accounts and fraud on these platforms?

[Morgan Hayduk]

It's a great question.

It's outside of the scope of our business to say if Twitter and Facebook could leverage blockchain technology.

I have heard anecdotally—I know the plural of anecdote isn't evidence, but I have heard enough anecdotally that I'll say it—that there are all kinds of interesting applications of blockchain for ID verification. That could be a space where, when you're at the account creation point, maybe there's an opportunity to integrate some form of secure ledger technology underlying the account verification step. This could ensure that people are using their real names, their proper IDs and things of that nature, so that there are fewer anonymous...or fewer accounts that are created specifically for the purpose of engaging in misinformation and the like.

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

Thank you, Mr. Hayduk.

Ms. Karringten, you didn't mention it in your opening remarks, but your website indicates that your consortium is developing innovative clean technology solutions for industries such as aerospace, oil and gas.

Does your consortium concretely help oil companies to reduce their fossil fuel energy production?

[Koleya Karringten]

The Canadian Blockchain Consortium is my volunteer role. I've been volunteering here since 2016.

My day job is designing combustion heating systems. I've partnered with the Edmonton International Airport to design for them new ground service heating equipment that reduces emissions by 72%. I've also partnered with oil and gas companies to develop out environmental heating systems that reduce their carbon dioxide emissions by up to 44%, eliminate their nitrous oxide and eliminate their carbon monoxide. I'm currently launching a new product line into the construction industry this winter that's going to radically reduce emissions as well.

My day job does not coincide with my volunteer role. We currently do not utilize blockchain within that business.