Industry Committee on Feb. 1st, 2023

[The Chair, Liberal, Joël Lightbound]

Ladies and gentlemen, dear colleagues, good evening.

I call this meeting to order.

Welcome to meeting number 55 of the House of Commons Standing Committee on Industry and Technology.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, September 26, 2022, the committee is meeting to study the current state of blockchain technology.

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

We are fortunate today to have several witnesses at what might be the final meeting on the important subject of blockchain technology in Canada.

By videoconference, we welcome Dina Mainville, the Founder and Principal of Collinsionless.

From the Digital Asset Mining Coalition, we have Sheldon Bennett, Chief Executive Officer of DMG Blockchain Solutions Inc., who is also a member of a digital assets mining coalition; in person, we have Daniel Brock, a Law Partner at Fasken, whom I'd like to thank for being here in Ottawa with us; with us virtually we have Geoffrey Morphy, President and Chief Executive Officer of Bitfarms Ltd; and here in person, we welcome Ms. Tamara Rozansky, Partner, Indirect Tax, at Deloitte Canada Informal Systems Inc.

Virtually, we have Ethan Buchman, Chief Executive Officer of Informal Systems and, according to my notes, Stephen Oliver, Chief Compliance Officer and Head of Calgary, at Tetra Trust Company.

Thanks to all the witnesses for being here with us today.

Each witness or group of witnesses has five minutes to give their address.

Without further ado, I would ask Ms. Dina Mainville of Collisionless to take the floor.

[Dina Mainville, Founder and Principal, Collisionless]

Good afternoon, honourable Chair and honourable members of the committee. Thank you for the invitation to speak today.

My name is Dina Mainville. I am the founder of Collisionless, a consulting and advisory services firm based in Toronto.

I started my blockchain career in 2016, and have spent much of my tenure in regulatory compliance. From one angle, I've been fortunate to work with government and regulators across five continents in educating them on virtual assets and advising on regulatory policy. I have trained hundreds of law enforcement professionals, including in Canada, to help them understand how to read blockchain-based data and how to conduct forensic investigations to combat child exploitation, financial crime and terrorist financing.

Since 2020, I have contributed to the work of Canada's largest and most active industry association, the Canadian Blockchain Consortium. I am the former chair of their Fintech Committee, and I am now building a regulatory committee that seeks to make meaningful contributions to the voluntary development of industry best practices rather than waiting for inherently coercive solutioning by regulators.

From another angle, I have also worked strategically with financial institutions globally as their interest in cyptocurrencies has expanded and contracted. I have witnessed, both personally and professionally, Canadian banks implementing policies to restrict their clients from accessing cryptocurrencies and threatening innovation at home by refusing to bank blockchain businesses. I have also worked with blockchain companies that seek to build alternatives to the gatekeeper plumbing of the incumbent financial system. Their tools help democratize finance and unlock individual economic prosperity for Canadians.

I stand before the committee today with three humble recommendations compiled from a unique vantage point.

Recommendation one is that Canada should consider how the low barrier to entry for new value creation will stimulate the Canadian economy.

Blockchain is an expression of advancements in computer science, game theory and cryptography that are changing the fundamental structure of the Internet itself—the merits and utility of which are widely understood. Many, however, underestimate the implications of these changes on how information is processed and owned, and the value dynamics within that. In this era of the new Internet, monetization pathways are being forged that unlock unseen potential for Canadians. These include owning and monetizing your digital footprint, being remunerated for the value you create inside decentralized autonomous organizations and participating in the fractionalized ownership of traditional assets that are becoming increasingly out of reach for Canadians, like real estate. Blockchain will unlock revenue generation opportunities for more than 92% of the Canadian population who are currently Internet users. That's approximately 35 million people.

This dynamic industry also offers uniquely low barriers to entry for more traditional forms of value creation—i.e., jobs. Academic institutions like Princeton and Berkeley provide free online blockchain courses that can be used to enhance digital literacy skills and to support remote work.

According to Glassdoor, the median salary for a blockchain developer in Canada is $92,000 per annum, the requisite tools for which are highly available, pending an Internet connection and a will to learn. York University reported in 2020 that demand for blockchain developers had increased by 374% in the greater Toronto area alone.

Recommendation two is that for Canada's blockchain economy to prosper, collaboration between government stakeholders and industry practitioners is required to develop a national regulatory framework. In the absence of such a framework, Canadians will continue to lose money to bad actors operating unregulated or poorly regulated exchanges in foreign jurisdictions. Good actors will continue to leave Canada in favour of building companies in places with better regulatory clarity, intercepting a major potential growth engine and causing massive brain drain across many sectors.

The realized market capitalization of Ethereum is approximately $240 billion. Binance grew to become the largest cryptocurrency exchange by trading volume only eight months after its launch. Both projects have Canadian ties.

In 2014, FINTRAC amended the PCMLTFA to ensure that crypto assets were adequately covered with respect to financial crime, but we have more progress to make. Canada has an opportunity to leverage our international standing and trust in leading global regulatory harmonization. We should take a nuanced approach to regulation by differentiating between types of crypto assets, by creating appropriate provisions for those assets and by regulating only the parts of this industry that make sense.

The Government of Canada should also communicate that regulation does not equate to endorsement, and that Canadian investors should still think for themselves.

Recommendation three is that this committee should advocate the dismantling of the Canadian banking sector's discriminatory policies against blockchain businesses.

The banking industry in Canada has classified blockchain businesses as high risk because of a perceived lack of adherence to traditional rules and concerns related to money laundering. Cryptocurrency businesses in Canada are required by law to register with FINTRAC and to meet the regulatory requirements of other money services businesses. The auditable transaction history offered by blockchains combined with the on-chain analytic capabilities of private companies have made transaction monitoring easy; in fact, when contextualized, blockchains offer greater transparency than any other financial instrument we've had. These concerns are no longer reasonable arguments for cutting the Canadian blockchain ecosystem off from financial services.

As a Canadian who is deeply involved as a member—

[The Chair, Liberal, Joël Lightbound]

Excuse me, Madam Mainville—

[Dina Mainville]

I was about to wrap up.

[The Chair, Liberal, Joël Lightbound]

You can wrap up, but can you speak a little more slowly? It's a real challenge for the interpreters.

[Dina Mainville]

Do you want me to go back?

[The Chair, Liberal, Joël Lightbound]

Maybe you can go back 30 seconds.

I received this suggestion from Mr. Généreux

You can wrap up. Take your time. Just go a little more slowly.

Thank you.

[Dina Mainville]

You're welcome.

As a Canadian who is deeply involved as a member of the blockchain community, I give you my commitment to support the Government of Canada on each one of these recommendations.

Thank you for your time. I look forward to answering your questions.

[The Chair, Liberal, Joël Lightbound]

I'm sorry for interrupting so close to the end. You have my apologies for that.

[Dina Mainville]

It's no problem.

[The Chair, Liberal, Joël Lightbound]

Thank you for your testimony.

Also, I think it's much appreciated that we have all these recommendations so clearly and concisely. They're useful as we head into producing our report.

We'll now turn to the Digital Asset Mining Coalition. Mr. Brock, the floor is yours.

[Daniel Brock, Law Partner, Fasken, Digital Asset Mining Coalition]

Thank you, Mr. Chairman. Thank you to the committee members for having me and my colleagues here to speak with you today.

My name is Dan Brock. I'm a partner at the Canadian law firm Fasken. I'm appearing today as the lead advocate for the responsible Digital Asset Mining Coalition.

The coalition is an informal association of 23 companies and organizations participating in Canada's growing digital asset mining industry. The coalition includes Canadian companies that conduct capital-intensive mining activities for digital assets. An example is Bitcoin.

The coalition was formed this past spring to oppose a legislative proposal published by the Department of Finance last February. My colleague Tamara Rozansky, from Deloitte Canada, will provide a little more detail shortly, but let me say that for the coalition, the tax proposal from the Department of Finance is arbitrary and harmful to Canada's digital asset mining industry.

Blockchain technologies and the digital assets they are capable of generating are emerging as a new value-creation sector in the Canadian economy and globally. Canadian companies involved in the new blockchain ecosystem require a sensible regulatory framework that will attract investment and encourage innovation, not tax policies that undermine their businesses.

I look forward to our discussion.

I now pass this on to my colleague, Mr. Morphy.

[Geoffrey Morphy, President and Chief Executive Officer, Bitfarms Ltd., Digital Asset Mining Coalition]

Hello, esteemed committee members. My name is Geoff Morphy. I am the president and CEO of Bitfarms.

Bitfarms was started just over five years ago. Today we are one of the largest publicly traded Bitcoin mining companies in the world. Our operations are headquartered in Brossard, Quebec. Between Brossard and Sherbrooke, we operate seven specialized computing facilities, as well as several others outside Canada. We currently employ 108 highly trained Canadians, and that number is growing. The average age of our Canadian employees is 33. In Canada, we use over 99% renewable power.

Directly and indirectly, we've added considerable value to the Canadian economy. We pay corporate and other taxes; we have spent almost half a billion dollars on our Canadians operations through investments in construction, materials and equipment; and we generate much-needed revenue for smaller locally owned hydro companies and their municipal owners. In this way, municipalities can better fund maintenance to improve local grid reliability, and our payments help to balance municipal budgets.

Bitfarms is proud of its Canadian foundation, and we are committed to growing our Canadian operations. I look forward to our upcoming discussion.

I turn now to my colleague, Mr. Bennett.

[Sheldon Bennett, Chief Executive Officer, DMG Blockchain Solutions Inc., Digital Asset Mining Coalition]

Thank you, Geoff.

Hello, Mr. Chairman. My name is Sheldon Bennett. I'm the CEO and founder of DMG Blockchain Solutions.

DMG is a publicly traded and vertically integrated blockchain and cryptocurrency company. We manage, operate and develop end-to-end digital solutions to monetize the Bitcoin blockchain.

DMG has two areas of business. First, we operate a data centre in British Columbia, using 100% renewable power. Second, we supply digital asset transaction infrastructure that allows financial institutions to safely and effectively transact with bitcoin.

DMG has built advanced digital asset software tools, employing developers from all over Canada. Our software services include assisting financial institutions and Bitcoin clients to comply with regulations that prevent the commingling of transactions with those of international bad actors.

Our operation in Christina Lake is in a rural part of B.C. and is one of Canada's leading digital asset mining facilities. We have invested over $60 million in our data centre, which was previously an abandoned wood processing factory that had been shut down for close to a decade. With our local power purchases, the Christina Lake community has been protected from power rate increases for several years now.

There are many other positive attributes to our industry in Canada. I look forward to your questions and comments.

I will turn now to my colleague, Ms. Rozansky.

[Tamara Rozansky, Partner, Indirect Tax, Deloitte Canada, Digital Asset Mining Coalition]

Thank you.

Hello, Mr. Chairman. My name is Tamara Rozansky. I'm a partner in the indirect tax team at Deloitte Canada based in our Montreal office. I'm a tax policy adviser to the coalition.

Let me start by saying we appreciate that tax matters are usually a topic for your colleagues on the Standing Committee on Finance, but in this instance, as it could impact the future of blockchain technology in Canada, the coalition's disagreement with the Department of Finance is directly on point.

Last February, Finance proposed amendments to the Excise Tax Act, Canada's GST/HST legislation. These amendments focused on digital or crypto-asset mining activities. The principal feature of these proposed tax amendments was to declare that digital asset mining activities are not a commercial activity in Canada. That would mean that companies engaged in digital asset mining would no longer be eligible to receive input tax credits, ITCs. For larger digital asset mining companies, these ITCs can have a value in the tens of millions of dollars.

Subject to certain exceptions, the fundamental principle of Canada's GST/HST is that all activity that is undertaken for gain or to produce income in Canada is deemed to be commercial activity and is taxable. In this respect, the GST/HST paid on any goods or services that go into this commercial activity is generally recoverable as an ITC refund by the commercial business. Only the end consumers of goods or services in Canada pay GST/HST that is not recoverable.

When only consumption and not production is taxed, the GST/HST promotes the global competitiveness of Canadian businesses. From a GST/HST policy perspective, the Finance proposal is unprecedented. In its current form, the proposal is a direct threat to the sustainability and continued growth of digital asset mining companies in Canada.

I look forward to your questions.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

We'll now turn to Mr. Buchman from Informal Systems. The floor is yours for five minutes.

[Ethan Buchman, Chief Executive Officer, Informal Systems Inc.]

Honourable Chair, thank you for having me, and thank you to the esteemed committee for its efforts to understand blockchain tech. I know that it can seem a bit daunting and mysterious, but I hope we're able to help.

My name is Ethan Buchman. I'm the co-founder of the Cosmos Network, which is the largest blockchain platform after Ethereum and is used by over 50 public blockchains collectively worth billions of dollars. I co-founded Cosmos in Canada in 2016 and have been building it ever since. I'm now CEO of Informal Systems, a Canadian company structured as a worker's co-operative with 16 member employees in Canada and 60 worldwide. We work on open source software to support the Cosmos Network and what we call the “Internet of blockchains”, or the interchain.

We believe the interchain brings the accessibility, transparency and verifiability necessary to upgrade the quality standards and protections provided by critical institutions in society. For instance, we're building solutions to help real businesses improve their cash flow, reduce risk and collaborate to grow.

My background is in biophysics, artificial intelligence and distributed systems. Recently I have been studying political economy and economic history. I completed a master's degree in applied science at the University of Guelph, which started in AI and pivoted to blockchains. I saw first-hand the potentials and the dangers of AI.

I know that this committee is investigating the risks of blockchains, but AI plays a key role in my story because of the risks it poses. These powerful AIs, and the data streams that drive them, are owned and controlled by large U.S. multinationals that are highly unaccountable and extractive. We have seen continuous evidence of how big tech may compromise the very foundations of our democracy—most recently, for instance, in Elon Musk's acquisition of Twitter.

Blockchains allow Canadians to dethrone U.S. tech monopolists like Elon and others by providing infrastructure that empowers individual Canadians to participate in the governance and ownership of their technology platforms. It enables them to control their own personal data instead of having it sold off by the likes of Google and Facebook. Blockchains make this possible by enabling the coordination and transfer of value at a previously unimaginable scale.

This threat of unaccountable monopolies is part of what led me to embrace blockchains and to pivot my master's thesis to focus on a new consensus mechanism. Published in 2016, my thesis has been cited over 400 times and is widely regarded as an essential introduction to blockchains and proof of stake.

One way I like to think about blockchains is as a kind of computer, but instead of the personal computers we all carry in our pockets and in our bags, a blockchain is what I call a community computer. Logically speaking, a blockchain operates as a single, verifiable computing device, even though it happens to run across many physical computers distributed around the world. What's unique about blockchains is the way those computers all around the world stay in sync with each other, or in “consensus”, as we like to say, providing a single, verifiable source of truth. This is the power of the blockchain consensus. It provides a new kind of compute infrastructure for communities.

There are countless use cases of blockchains in health care, food security, supply chain, ecological health and many more, but I have also heard this committee ask about the use cases of cryptocurrencies. Cryptocurrencies have seen increasing adoption by those living under more authoritarian or inflationary regimes. They offer support for immigrants and for the 15% of underbanked Canadians. They allow Canadians to participate in new kinds of global organizations that can share value more equitably.

I have been building companies for over eight years. I'm an angel investor and an associate at the University of Toronto's Creative Destruction Lab. I know first-hand the kinds of uncertainties that plague entrepreneurs, especially in this industry, as they try to innovate, create new jobs and grow the Canadian economy. We need clarity and support from the government so that we don't, as a country, miss this opportunity for growth.

There are a few areas of regulation I might highlight. First, we need a federal blockchain strategy that provides clarity for regulators and for entrepreneurs. Today it's not clear which regulators have jurisdiction over which blockchains and blockchain products. This is a huge problem for entrepreneurs, who can't possibly know the rules of the road. Too much friction and restriction can greatly inhibit opportunities. A national strategy that's providing significant room for innovation while also thoughtfully balancing regulation is critical for the success of our domestic industry.

The second area is taxation. This industry has created significant new wealth, but the tax code imposes friction and complexity in using cryptocurrencies for payments, donations and other use cases.

The third area is financial services. This technology allows users to engage in non-custodial ways, meaning they don't need to trust a service provider with their data or their value. We need protections for the rights of Canadians to build and use non-custodial wallets and the open source cryptographic software that underlies them. These software tools have become critical in the preservation of international human rights. Cryptocurrencies are extensions of these tools.

Canada has a unique opportunity to be a leader in this field as it spreads across every sector of our society. I'm grateful to offer my help and to answer any questions today or in the future.

Thanks so much for your time.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

Finally, we will turn to the Tetra Trust Company.

Stephen Oliver, you have five minutes.

[Stephen Oliver, Chief Compliance Officer and Head of Calgary, Tetra Trust Company]

Thank you, Mr. Chair and committee members.

My name is Steve Oliver, and I am the chief compliance officer and head of Calgary for Tetra Trust Company.

First, I would like to commend the committee for dedicating time and space to undertake this important comprehensive study on blockchain technology and for inviting Tetra to contribute our views.

As a native Albertan with over 20 years' experience in the oil and gas industry, I've been delighted to have the opportunity to transition my career into this exciting and innovative space here at home.

Tetra was founded in 2019 and is Canada's first and only regulated custodian for crypto assets. As a Canadian registered trust company, Tetra has fiduciary responsibility to act in the best interests of its clients. The company meets the requirements with respect to custody of registered entities as a qualified custodian under rules NI 31-103 and NI 81-102.

Tetra was established as a special-purpose trust company incorporated under the Loan and Trust Corporations Act of Alberta. It received its licence from Alberta's Ministry of Treasury Board and Finance in 2021. Tetra is Canada-wide, with offices in Calgary and Toronto, and has a diverse board of directors with deep financial market expertise. They range from our accomplished chairwoman, who was CEO of a federally regulated trust company, to our Québécois CEO, who joined Tetra from Canada's largest bank.

This committee has heard experts speak to the merits of and use cases for digital assets and blockchain technology. Today I will add to what has already been said and speak to the manner in which digital assets and regulated entities like Tetra can responsibly coexist within our current financial system and Canada's emerging CBDC, the central bank digital currency system.

We feel it is important that this committee have a clear sense of the role that regulated custodians play in these systems. Digital asset custodians are the foundational piece of all risk mitigation strategies related to digital assets, for a very simple reason: They are the guardians of the assets. Just as they are in traditional finance, custodians act as a trusted independent third party to secure the assets of institutions and their underlying investors. The use of specialized third party custodians would have negated the occurrence of most well-known, industry-tarnishing events in cryptocurrency, such as those involving Quadriga and FTX.

As you heard from Wealthsimple in a previous committee meeting, in Canada, and indeed, globally, third party digital asset custody services are in high demand by institutional investors, corporations, regulated exchanges, digital asset miners and individuals. Despite this high demand, Canada is not yet at the stage of having a robust offering of digital asset custodians, leaving a critical void in the digital asset ecosystem. As a result, the majority of digital assets held by Canadian institutions reside outside of Canada and are held by foreign custody service providers. This means Canadian assets are at risk due to extraterritorial jurisdictional issues, and it makes regulation and oversight by Canadian officials difficult.

One very recent example is that involving a U.S. court ruling made on January 4, 2023, in which it was determined that the deposits of now bankrupt cryptocurrency lender Celsius belong to the company and not the clients for certain of the company's products. This is an incredibly important point when considering that three out of the four trading platforms most used by Canadians are headquartered outside of Canada and that only one of Canada's regulated exchanges is using a domestic custodian.

Given the level of consumer risk associated with digital asset custody, it is not enough to simply be a custodian or to have technology that enables custody of digital assets. Rather, this space requires custodians that have achieved regulated status. Regulated custodians, such as Tetra, have undergone significant levels of due diligence by regulatory bodies and are subject to continuing external oversight. Controls such as SOC 2 certification, external proof of reserve auditing, and segregation of assets must be the norm and not the exception. It is these regulatory mandated standards that can build trust within this industry and contribute to less inherent risk and higher confidence levels for all market participants.

In closing, while innovation related to blockchain technology is inevitable, it does not have to come at the cost of market stability or investor protection. Tetra was created to enable such innovation to flourish in a regulated, controlled and sustainable manner. We believe it is imperative and in the best interests of all market participants that Canadians can rely on independent, regulated and domestic custodians to navigate this new ecosystem while minimizing risk and market disruptions.

We look forward to continuing to be part of the evolution in this space and we are happy to take any questions.

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Oliver.

To start the discussion, I'm giving the floor to Mr. Williams for six minutes.

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

Thank you, Mr. Chair.

Thanks to all of you for coming to the industry committee. This is a fascinating subject.

This is a new and emerging technology. It seems that what we've heard from a lot of witnesses in the past several meetings is that this is something that Canada could lead in and perhaps is leading in. Certainly we follow the news, and I know that today's National Post did talk about how perhaps some of these regulations could deter further development and perhaps cause a decline of this industry in Canada.

I'm going to start with the Digital Asset Mining Coalition and any of you who could answer.

I tried to get more data on this, and I know that it's an emerging industry and not regulated, which might contribute to that, but what is blockchain worth to Canada right now? I'm looking at jobs, GDP and, perhaps in some of your answers, what is the potential for this industry in Canada. What could it mean if we do things in the right way?

[Daniel Brock]

Unfortunately, we're kind of at the stage where a lot of this is anecdotal and prospective. The digital asset mining industry is a part of the bigger blockchain story. We can talk about the kinds of economic contributions that those businesses have made and are planning to make in the Canadian economy in terms of jobs and investment, but to say what it is worth or what it will be worth is very difficult to pin down.

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

Can we say that there are tens of thousands of jobs right now, or a hundred thousand? Do we have an idea of where it's at?

[Daniel Brock]

I'll pass this on to Mr. Morphy. Maybe he can talk a bit about that from Bitfarms' perspective.

[Geoffrey Morphy]

Sure. Thank you.

I can't talk about the whole industry because I don't have those statistics, but I can talk about our company, Bitfarms.

We have 108 people in Canada working for us. We have more internationally. They are specialized. They are highly trained. They are in the trades, they're highly educated and they're located across the country. To provide a bit of quantitative numbers for you, we have spent, over our five-year history, over $500 million on operations, on capital expenditures, on materials and on construction. It's been a substantial investment.

We are a capital-intensive industry, and it's a major commitment for the types of assets we work in to do this well and to do it at a global scale.