Industry Committee on Feb. 1st, 2023

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

How would you describe the volatility of cryptocurrency, given its recent history? Do you think it's a high risk, low risk or medium risk?

[The Chair, Liberal, Joël Lightbound]

I'm afraid that's going to have to be a question for another round, Mr. Dong, because you're out of time.

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

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Thank you, Mr. Chair.

I'd like to begin by pointing out that this will be the final meeting of this committee to be attended by my parliamentary intern, Sonja Tilroe. I'd like to thank her because whenever we manage on occasion to look good in committee, it's because of the people working hard for us behind the scenes. I also would like to thank her for the excellent work she has done for me and my team. I'm also aware that other parliamentary interns contribute to the work of the committee. Sonja will have an opportunity to help other teams.

My question is for Mr. Oliver of the Tetra Trust Company. I met some Tetra representatives in Quebec, who told me that Tetra was the only regulated custodian for crypto assets in Canada.

The issue of assets that remain in the hands of owners, but that have an impact on operations, is a very important one. Indeed, when a company holds its assets in Canada, it deals with Canada's Autorité des marchés financiers, and must demonstrate transparency, comply with audit requirements and provide proof of reserve audits twice a year. That's what I took down in my notes. The end result is that too many Canadian firms send their assets to the United States, where governance is subject to American statutes, which, of course, are not so clearly defined there.

I'd like you to tell us a little more about the importance of leaving assets in Canada and the risks incurred by investors when assets flow through the United States.

[Stephen Oliver]

Where the custodian resides really becomes most relevant in a default situation, when things go wrong.

If the private keys reside with a domestic regulated trust company, for example, asset holders can rest assured that the windup of the custodian will follow a predictable course of action as established under Canadian laws. Also, if the custodian is a trust company, the client has certainty that the legal title to the assets remains with the client and will therefore be returned to the client as part of any default proceedings. With international custodians, given that other regulations and legal proceedings would be in play, there's an inherent and unavoidable level of extraterritorial risk.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Can you explain to us why Canada doesn't require some or all crypto assets to be kept in Canada?

What difficulties do companies point to for not keeping the money in Canada?

[Stephen Oliver]

There actually are reasonable reasons that international partners are utilized. It's really a reflection on the development still required in this industry within Canada. There certainly are certain types of investment instruments, such as ETFs, for example, that require significant operational capability to do the large volumes of clearing and settling of activities. That's the value that's currently added by international partners.

That said, Tetra would advocate that Canadian institutions can still hold most assets domestically with limited tactical amounts of assets residing with international custodians as the Canadian marketplace continues to grow.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

If the government wants to strengthen its technological hub, what should it be doing right now?

What are the underpinnings of this new digital era upon which your industry rests? Are we talking about artificial intelligence, quantum computers, the capacity to manage bulk data, or is it more a matter of regulation?

[Stephen Oliver]

It would be regulations, primarily. I suppose there are some contrary recommendations we could put forth.

First, as the regulations are considered and developed, we recommend that high priority and focus be concentrated on the area of custodianship.

Second, as it stands, Canadian securities regulations leave it to the best judgment of the institution holding customer assets to determine if a foreign custodian should be used. We believe there should be some guidelines implemented to specify the circumstances and the corresponding controls that would allow assets to be held outside of Canada.

Third, harmonization between—

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

I have to interrupt you.

Your voice is not clear for interpretation.

[Stephen Oliver]

My apologies. Is that better?

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Could you speak louder and more clearly, please?

[Stephen Oliver]

Sure.

Third, harmonization between provincial and federal standards, and rules for custodians, would be a big step in the right direction.

Finally, we recommend the establishment of some risk management and governance best practices for custodians as well. It's primarily regulatory-driven.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Since you're talking about provincial regulation, can you give us examples of effective legislation in some Canadian provinces?

[Stephen Oliver]

The bulk of the provincial securities regulation is harmonized by the CSA. However, there are differences between the CSA guidance and other federal guidance, such as OSFI and IIROC.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

I've been told that Alberta was the only province to have effective regulation and legislation. Could you confirm this?

Is that why your offices are located in that province?

[Stephen Oliver]

I think Alberta has been a bit of a leader. It certainly has put a lot of resources into this at the regulatory level, which I can attest to, so yes, perhaps, at this stage, but there is actually excellent engagement happening across the provincial securities commissions.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Thank you very much.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Lemire.

Mr. Masse, you have the floor.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thank you to the witnesses.

I think I'll start with you, Ms. Mainville, because you mentioned some of the international agreements, but I invite any other witness to chime in.

With regard to how we deal with international regulations, would we be wiser to start with a more comprehensive partnership in a trade agreement—say, for example, the U.S.-Canada-Mexico agreement—or should we look towards Europe? There could be a practice, at the end of the day, to try to negotiate some of the standard regulations through trade agreements. Aside from that, we would have to be going it alone on this, which could take a long time to do.

I'm just wondering what your thoughts are on that. Is it something for which we should be focusing on setting an example with one trading bloc partner, whether that has European elements or it is domestic or closer to home? In Canada and the United States, we have a lot of integrated industries—such as where I'm from, with the auto industry, for example—for which there are standard regulations. When they're out of whack, it's easier to deal with them individually than it is to deal with more complex issues.

[Dina Mainville]

That's an excellent question, Mr. Masse. Thank you for giving that question to me. I actually have a couple of thoughts here.

I think that regulation for crypto assets is a really difficult problem. I've seen regulators trying to tackle it for a number of years. I've seen it come from the top down with, for example, the Financial Action Task Force travel rule that I was speaking to.

That's actually in effect here in Canada, but the complexity with it is that you're doing cross-border transfers with organizations that may not be following the same regulatory standards, so if you're talking about something like data exchange, it becomes very difficult to actually make sure those things are followed through on.

I think I would like to see Canada working internally first. I would like to see us collectivize. I would like to see better collaboration among the provinces. I really do think we could work collectively through a regulatory framework. It wouldn't mean it would have to be 500 pages long; i could just be some structure we could work on collectively.

I do think there are other jurisdictions that have gone in directions we can benefit from in terms of learning. I do think the new MiCA regulation in the EU is much more comprehensive than many of the regulatory moves we've seen previously.

I think Bermuda has something to offer. I think even the Cayman Islands and the correspondence that the regulator has had with industry there is something we could benefit from learning from.

To concisely answer, I would suggest we start internally first, but international co-operation, I think, is absolutely the way we should be going for the long term.

[Brian Masse, NDP, Windsor West, ON]

Do you have any suggestions on time frames that are necessary for this? I don't disagree that we have to have a plan and then bring that forward.

These are just hearings of the industry committee. This is very much an entry-level study in many respects. The chair brought this forth, which is excellent. It's the first time we've even had this brought up. I've been on the committee for a long time, so I thought this was a really welcome opportunity. What are our time frames looking like here in terms of getting a response to the minister?

Alternatively, in the past, the country has gone to a white paper or something like that, but then you're getting into comprehensive consultations across the country, which could take a long time.

Then parliamentary elections have been rather difficult to predict, and on top of that, quick, so what are we looking at in terms of a goal? Do you have advice for us with respect to a time frame to get this to the minister and to get a response for us and to get something more official done?

[Dina Mainville]

I think I have seen other jurisdictions move inside a one-year time frame.

That being said, I think Canada has the resources to move at our own pace. I think, on the industry side, we have resources that are willing to lend expertise. I know there are resources within the provincial regulators at the CSA, at OSFI and at the Bank of Canada that are ready to mobilize as well.

I think what we need is collective action. I think we just need a forum within which we actually discuss these matters, reach consensus and have folks who put pen to paper, and I think we can get it done at our own pace.

[Brian Masse, NDP, Windsor West, ON]

Does anybody else have any comments on that? I just want to double-check before I go to my next question.

Go ahead, Mr. Bennett.

[Sheldon Bennett]

Just to add to that, I've been invited, as a member of the accounting standards board, to work on federally updated accounting standards across Canada for crypto assets and crypto accounting, so there is some action happening. It's very positive, especially for public companies, to see that on the accounting side the regulatory body is looking at this seriously and is looking at giving guidance to auditors and to companies. If we could find more areas of government and government interaction, I think this would really help Canada move forward.

I would say that Canada should take this on itself first, before looking to its favoured partners. We could set the example by getting control of this, understanding it, talking it out and figuring out what regulations make the most sense to develop this industry. If you bring on a lot of other partners, you do get a lot of extra knowledge, but it is slow, and the movement of the financial institutions that are involved in crypto, crypto businesses and this whole new industry is very fast.

As Mr. Morphy said, the median age is 33. We can't find enough IT developers to meet the demand in many parts of the industry, This industry is going to move quickly, whether Canada wants to or not. I think there is a bit of urgency in getting national policies, national regulations and a national path forward.

I was encouraged to see that the federal government put out a very good policy for clean energy across Canada and that provinces put out their policies as well. It would be great to see something similar with digital assets and where that's going to go in the future.

[Brian Masse, NDP, Windsor West, ON]

Thank you. I think that's my time.