On Wednesday, October 8, Bitcoin advocate Andreas Antonopolous testified before the Canadian Senate Committee on Banking, Trade, and Commerce on the subject of digital currencies and regulation. The meeting was the one in a series of eleven scheduled by the Senate Committee on the subject of the “Study on the use of digital currency.” Previous meetings featured presentations by representatives from Visa and Mastercard; the Bitcoin Embassy, the Bitcoin Alliance of Canada, and the Bitcoin Foundation; BitPay and PayPal; the Canada Revenue Agency; CAVirtEx, the Bitcoin Strategy Group and Bit Access; and the Bank of Canada, among others.
The Committee appeared very impressed with Antonopolous' reputation and presentation; the Committee Chairman, Senator Irving Gerstein, introduced Antonopolous as “the Bitcoin guru” in his opening remarks before ceding him the floor.
Antonopolous' statement emphasized the decentralized model of security and transfer that Bitcoin introduced to the world for the first time through block chain technology. He explained how block chain technology obviates the need to trust in a third party intermediary to reconcile transactions and draw funds from accounts. Antonopolous explained how the Bitcoin model differs from legacy centralized financial institutions, and that these differences call for different responses from governments.
Antonopolous argued that existing regulations imposed on legacy financial institutions based on centralized security models were therefore ill-suited for decentralized financial networks like Bitcoin. Introducing legislated defined identities or access control mechanisms to a decentralized system like Bitcoin would actually make Bitcoin less secure, he argued.
Antonopolous also highlighted the wide range of innovations that are possible using Bitcoin technology. Some of these innovations may be able to provide the kinds of consumer protection mechanisms that government representatives would otherwise impose through regulations. He warned that rushing to regulate this new technology may quash the beneficial innovations before they develop. Therefore, regulators should adopt a hands-off approach to Bitcoin for the near future.
Following his opening presentation, Antonopolous fielded questions from the Committee members.
Many members were concerned with the potential for Bitcoin to be used by criminal groups for illegal purposes. Antonopolous explained that Bitcoin's public ledger of all transactions actually renders Bitcoin a less attractive medium for crime than the current reigning currency of criminal choice: the US dollar. By tracing the block chain, Antonopolous assured him, law enforcement can and very effectively has clamped down on crime financing with bitcoins.
Others pressed Antonopolous about the different regulatory approaches that they should take. Senator Black noted that during an earlier hearing on Bitcoin, representatives from CA Vertex actively called for government regulation. Black asked Antonopolous whether the Bitcoin community was divided on the question. Antonopolous responded that CA Vertex is a Bitcoin businesses that operates in a strange legal area: It uses Bitcoin, but it is a centralized institution that is beholden to the same problems that riddle traditional financial institutions, like exposure to massive identity theft and liability for total account access. Antonopolous agreed that these kinds of businesses need oversight in the same way that traditional centralized financial institutions need oversight. But Antonopolous emphasized the need to clearly distinguish between Bitcoin users and businesses that operate in a decentralized, self-regulating manner and those that are centralized like CA Vertex. He urged the Canadian government to allow decentralized Bitcoin uses “breathing room” for maximum innovation and development.
Following up on this response, Senator Campbell questioned how long that “breathing room” should be. Antonopolous compared the development of Bitcoin to the development of e-mail and the Internet, and estimated that Bitcoin should be allowed at least 8 years to develop without interference.
Additionally, Antonopolous urged the Committee to provide clarity where possible. In particular, he encouraged the Committee to clearly state that Bitcoin use is legal and that the government will not retroactively interfere. He urged regulators to formulate clear tax laws that would provide more certainty to businesses and consumers using Bitcoin in Canada.
During the question and answer session, Antonopolous repeatedly reiterated his belief that Bitcoin can empower the underbanked and unbanked populations of the world, citing a World Bank estimate that 6 billion people live in such conditions.
Towards the end of the meeting, Antonopolous discussed some of the non-currency applications of block chain technology, including distributed property and notary services. He explained how Bitcoin could be used to augment “sharing economy” services like AirBnB and ZipCar; physical property can be programmed to unlock when the proper payment is received in the block chain. The committee was generally fascinated by the presentation and appeared excited for the possibilities that block chain technology could bring, while remaining weary of the potential for crime.
A full transcript of Antonopolous' remarks and the question and answer session is below.
ANTONOPOLOUS' OPENING PRESENTATION
Antonopolous (2:00): Thank you chair and committee members, I appreciate the opportunity to contribute to these proceedings about digital currency. My experience is primarily in information security and network architecture. I have a Master’s degree in network and distributed systems and have worked in the field since 1992. I spent 20 years working on networks and data centers for financial services companies before I found Bitcoin in late 2011. I have been working full time in the Bitcoin space for the past two years and written a book on Bitcoin for software developers. Today I welcome the opportunity to talk to you about Bitcoin security, the decentralized architecture that underpins Bitcoin security, and the implications that architecture has for privacy, individual empowerment, innovation, and regulation.
Until the invention of Bitcoin in 2008, security and decentralization seemed like contrary concepts. Traditional models for financial payments networks in banking rely on centralized control in order to provide security. The architecture of a traditional financial network is built around a central authority, such as a clearinghouse. As a result, the security and authority have to be vested in that central actor. The resulting security model looks like a series of concentric circles with very limited access to the center and increasing access as we move further away from the center. However, even the most outermost circle cannot afford open access. In such a security model, the system is carefully protected by controlling access and ensuring that only vetted individuals and organizations can connect to it. The entities near the center of the traditional financial network are vested with enormous power, act with full authority, and therefore must be very carefully vetted, regulated, and subject to oversight.
(4:00) Centralized financial networks can never be fully open to innovation, because their security depends on access control. Incumbents in such networks effectively utilize access control to stifle innovation and competition, presenting it as consumer protection. Centralized financial networks are fragile and require multiple layers of oversight and regulation to ensure that the central actors do not abuse their authority and power for their own profit. Unfortunately, the centralized architecture of traditional financial systems concentrate power, creating cozy relationships between industry insiders and regulators and often lead to regulatory capture, lax oversight, corruption, and in the end financial crises. Bitcoin and other digital currencies based on the block chain architecture are fundamentally different. The security model of block chain currencies is decentralized, there is no center to the network. No central authority, no concentration of power, and no actor in whom complete trust must be vested. Instead, the core security functions are put in the hands of the end users of the system. In this architecture, security is an emergent property of the collaboration of thousands of participants in the network, and not the function of a single authority.
(5:20) In addition to the differences in architecture, there are also fundamental differences in the nature of the payments themselves. Digital currencies like Bitcoin are much more like cash than bank accounts or credit cards. The transfer of value in Bitcoin is a push mechanism, not a pull mechanism, as is the case with credit cards, debit cards, and most other digital payments. A bitcoin payment is not an authorization to pull from your account, instead, it pushes the precise payment amount itself as a value token directly to the named recipient. A single transaction does not authorize any future transaction, or expose the user’s identity. The transaction itself is unforgeable and unchangeable. As a result, bitcoin payments can be transmitted in the clear without encryption over any network and can be stored in unsecured systems, without fear of compromise.
(6:15) Bitcoin’s unique architecture and payment mechanism has important implications for network access, innovation, privacy, individual empowerment, consumer protection, and regulation. If a bad actor has access to the Bitcoin network, they have no power over the network itself and do not compromise trust in the network. This means the Bitcoin network can be open to any participant without vetting, without authentication, or identification, and without prior authorization. Not only can the network be open t anyone, but it can also be open to any software application, again, without prior vetting or authorization. The ability to innovate without permission at the edge of the bitcoin network is the same fundamental force that has driven internet innovation for 20 years at a frenetic pace creating enormous value for consumers, economic growth, opportunities, and jobs.
(7:14) Bitcoin’s decentralized nature affords consumer protection in the most powerful and direct way: by allowing Bitcoin users direct control over the privacy of the financial transactions. Bitcoin does not force users to surrender identity with every transaction and put their trust in the chain of supposedly vetted intermediaries who much be trusted to control access to securely store and protect transaction data and vulnerable account identifiers. Bitcoin transactions never expose vulnerable account identifiers and Bitcoin users can protect the privacy of their transactions without relying on or trusting any intermediaries.
(7:55) Because in Bitcoin trust is not vesting in central actors, there is no need for centralized regulation and oversight. When properly architected, Bitcoin financial services are not vulnerable to central point of failure, which would necessitate heavy-handed oversight and regulation. Instead, the power lies with the end user, whose interests are most aligned with the protection of their own funds. While individual Bitcoin wallets can be targeted and compromised if not properly secured, the Bitcoin network does not suffer from centralized systemic risks. Contrary to popular misconception, Bitcoin is not unregulated. Rather, several aspects of the Bitcoin network and financial system are regulated by mathematical algorithm. Algorithmic regulation in Bitcoin offers users predictable, objective, measurable outcomes such as a predictable rate of currency issuance. These outcomes are not subject to the whims of centralized institutions or committees, which are both corruptible and offer placed outside of democratic oversight. The Bitcoin user can predict the monetary supply thirty years from now, instead of hanging on the nuanced intonation of a single adjective by some high official of central banking, who can dramatically change an entire country’s monetary velocity.
(9:20) Bitcoin’s decentralized architecture foes not easily conform to the expectations and experiences of consumers or regulators because there has never been a large-scale, secure, decentralized network before. The combination of decentralization and security is the novelty at the heart of Bitcoin. In trying to understand consumer protection, oversight, audit, and regulation of Bitcoin, there is a risk that many will try to apply familiar models of the past to this new digital currency system. These models re all centralized, and designed to provide regulation and oversight of centralized financial networks. Centralized solutions will be easier to understand and seem familiar, however, they are both inefficient and unsuitable for this new form of decentralized financial network.
(10:05) I urge you to resist the temptation to apply centralized solutions to this decentralized network. Centralizing Bitcoin will weaken its security, dull its innovative potential, remove its most destructive yet also most promising features, and disempower its users, while empowering incumbents. Consumer protection will not be achieved by removing Bitcoin’s built-in privacy characteristics. Demanding user identifiers and adding access control mechanisms on top of the Bitcoin network, and then trusting those identifiers’ chain of intermediaries, will only replicate the failures of the past by introducing single points of failure into a network that has none.
(10:40) We cannot protect consumers by removing their ability to control their own privacy and then asking them to entrust it in the same intermediaries who have failed them so many times before. Most failures in Bitcoin’s security are the result of misguided attempts at centralization and removing control from the users. In the new decentralized financial network we have the opportunity to invent new decentralized security mechanisms based upon innovations such as multi-signature escrow, smart contracts, hard wallets, decentralized audit, and algorithmic proof of reserves. These are the new decentralized regulatory and security tools that are most appropriate for a decentralized digital currency.
Thank you for the opportunity to address you.
QUESTION AND ANSWER
IRVING GERSTEIN (11:30) Thank you Mr. Antonopoulos for your opening remarks. They have clearly resonated and stimulated a number of question. We’re going to turn it over to senators for questions. If I might make an observation. In your remarks, you have told the Committee that the decentralized security of block chain currencies is indeed secure, and that Bitcoin financial services are not vulnerable to central points of failure, which would necessitate oversight and regulation. And as a result, as I hear you, you’ve come to the conclusion that this currency should be left hands off by the government and other regulatory bodies, and I quote, “centralizing Bitcoin will weaken its security.” While listening very closely to your comments, I couldn’t help but observe that you make absolutely no mention of illegal activity supporting a cryptocurrency like Bitcoin, and I was surprised that you make no mention of money-laundering, terrorist financing, or other possible misuses because of the anonymous and open nature of Bitcoin. I think you, uh, stated in your presentation that Bitcoin network can be open to any participant without vetting, without authentication, or identification and without prior authorization. I suspect that the misuse or the potential misuse of Bitcoin for nefarious purposes is very much a concern to Canadians as well as for this Committee. Would you have any comments on that?
ANDREAS (13:21) Absolutely. I believe that there is a great misconception in the idea that Bitcoin use is anonymous or that the network itself is anonymous. On the contrary, the central public ledger allows any participant to observe all transactions that occur on the network. Now those transactions are not always tied to a specific identity, but with the use of traditional law enforcement mechanisms when an identity is attached to a specific transaction, that transaction can be followed throughout the network, and therefore the network does not afford more anonymity. In fact, it is easier to implement strong transparency and accountability features on the network than it is to achieve strong anonymity on the bitcoin network.
(14:14) Furthermore, it is not very convenient network for such uses. The vast majority of such activities really occur with cash, in fact, with the US dollar. I don’t see Bitcoin as the primary vehicle for illicit activities of that type. I see the tremendous potential for the use of Bitcoin among the more than 6 billion people in the world who have very limited access to international currencies, international credit markets, and international trade. I think that use far outweighs the tiny minority that might put such currencies to illicit use.
SENATOR BLACK (15:05) Thank you very much Mr. Chairman and thank you very much Mr. Antonopoulos. I’m finding much interest in what you have to say. Let me outline first of all what I’m hoping to come to understand from you. I’m interested in coming to learn what is needed to ensure that this innovation can continue to develop. That’s my premise, right or wrong. But I do, building on the Chairman’s initial comments, have a question or two for you. When CA Vertex testified before this committee, they stated that they’d like to see Bitcoin regulations put in place as soon as possible to give clarity on how Bitcoin is classified. They believe, they told this committee, that this would allow Bitcoin to thrive in Canada. In your remarks, you stated that Bitcoin should not be regulated centrally because it will stifle innovation. Considering that other groups have echoed the statements of CA Vertex, help me with the disconnect that I’m hearing between the evidence of CA Vertex and what you have said today.
ANDREAS (16:25) Absolutely. I believe that the best way to help Bitcoin is to ensure that there is clarity in the treatment of Bitcoin. And that Bitcoin is not essentially forced into contorting itself into regulatory structures that are designed by banks for banks or with traditional models of finance in mind which are primarily centralized, and recognizing that Bitcoin as programmable money with capabilities such as digital multisignature escrow, has many more flexible ways of responding to the needs for consumer protection. For example, in the traditional banking environment, unless you hold cash, every account that you have as a consumer is a custodial account. That means that the account funds are held in trust by a bank and what you have in return is essentially a promise not that that money will still be there tomorrow morning. The bank controls the funds entirely. Bitcoin allows a much more varied range of control between a consumer and a financial services institution that they may use from completely decentralized control, where the consumer end user is the only one with full control over the money, to the complete custodial accounts, where a financial services institution has full access to the keys and the consumer has none. In between, there are also models that are hybrid, where the bank may have a signatory role, but not be able to change the direction of the funds, simply to approve transactions. Within this very broad range of possibilities, obviously some aspects of that do need to be regulated. What I mean by that is, if you simulate a traditional financial environment with a custodial account where you take full control of a user’s funds, then those funds are now outside of the Bitcoin security model. They are no longer protected by the user’s control of the keys. They are no longer protected by the block chain. They are now in a gray area, where they are not covered by regulatory requirements for capital adequacy, audits, security requirements and controls, etc. But they are also not covered by the Bitcoin security model. We’ve seen that whenever that has happened, it results in disaster. Almost all of the exchanges that have been attacked in Bitcoin had a full custodial model like that. However that is not the only model that exists. There are digital Bitcoin wallets where the user has complete control. There are wallets where the user has complete control but transactions cannot happen unless an additional signature is placed by an institution that acts as a risk manager to ensure that even if the users’ systems are compromised, the money can’t be stolen – a hybrid model. If you lump all of those together under a single unifying regulation, assuming it’s all just like a bank, then you miss out on the opportunities to create better solutions with this new programmable money. So I do believe that certain models of Bitcoin use must be regulated if control over the users’ funds has been centralized, then that institution puts consumers at risk. But to lump a decentralized model where users still have full control over their funds and an intuition can’t steal their money under that same regulation, is not only misguided but does not leave any room for that technology to develop further.
SENATOR (20:15) May I ask one further question? Thank you very much for that. So what would you suggest to this committee in terms of regulation, if any?
ANDREAS (20:25) I believe we’re still at the very early stages of this technology. Not only is Bitcoin new, but Bitcoin is already evolving. For example, the capability to do a multisignature transaction, where there can be up to 20 different signatories on a single transaction, and a transaction can be controlled by any mixture of signatures, that technology was introduced in 202, four years after the introduction of Bitcoin. It came into full fruition, or full availability, in 2013. So, already Bitcoin is developing new and exciting programmable capabilities for user security. I think this technology needs time to breathe. It needs time to show the full potential of what is possible with decentralized programmable money. Until that time, I think opening up those possibilities by making clear distinctions where the technology allows it, between centralized and decentralized modes of operation, for example. Understanding that those nuances can create niches where new players can come in to the financial services market and introduce innovation, competition, quite honestly, disruption, into the banking industry, by trying out new models for consumer protection – which in my mind are superior to the ones who have today.
SENATOR (21:55) So your answer is what? What should this committee do if anything?
ANDREAS (22:05) Wait until the technology is better understood by all of us, and understand that there are nuances in this technology that requires very careful treatment because a blanket treatment, as if this is just a currency, which it is not, it is a network for money, treatment as if there is only one application of the Bitocin currency, which it is not, there are many applications based on this model, would stifle this technology in its early days.
SENATOR CAMPBELL (22:40) Thank you Chair and thank you so much for coming today. I remember when I got an IBM that had the X-backspace, so I could correct letters, and I thought “nothing is ever going to be cooler than this. It’s impossible.” I’m 67, that’s my generation. When you say it needs some breathing space, would it be fair to say that the younger generation gets this? Moreso than my generation?
ANDREAS (23:20) With new technology I think that’s the case.
SENATOR (22:24) And do you think it’s fair to say, for instance, I would doubt very much that I would get into bitcorns. I don’t really understand it even still, and we’re on our 11th meeting. But I know that when I talk to younger people, they totally get it. They don’t have any questions at all. They’re like, this is where we’re going, this is how we’re going to get there. In fact, I’ve been told to keep my old nose out of it. I think you explained it. How much time does it take to breathe? How long do you think that would be? How rapid is this going to come upon us.
ANDREAS (24:10) I would estimate that Bitcoin today is approximately in the same position as the internet was in 1992. In 1992, when I used email, it required command line UNIX skills typed into a mainframe. It was very very difficult. Approximately 10 years after that, it had already reached mainstream adoption among, especially younger people, and almost exactly 20 years after that, my mother got her first iPad and was able to send her first email. It took a while until the technology went from something extremely esoteric used only by someone working in a computer science department until my mother could do it with the swipe of her finger, and she’s a self-acknowledge technophobe. It can take some time. What I can tell you for sure is I think this one’s going to be about three time faster, and that’s because we’re not deploying physical infrastructure and we already have the internet as a medium on which we can spread this technology. So I believe that within 8 years we’re going to see very mainstream applications that are going to be much easier to use and secure that will allow consumers to use Bitcoin in a way that feels very comfortable and at the moment we’re not there.
SENATOR (25:30) One more question. The question I have is that if you don’t need any centralized oversight, you say the front end user and the end user control the whole thing. If there is nobody finding out who is the front end user, how can we be so sure that we won’t see ISIS or one of these other whack job crews [lol] use this as a method of transferring money around the world?
ANDREAS (26:15) I firmly believe that the possibility for positive use of this technology so far outweighs the very very small possibility for negative use of this technology. The truth is, that ISIS is probably using pallets of money that they stole from allies during their reign of terror, and not Bitcoin. I think it’s really a matter of understanding that to limit a technology that has the possibility of bringing economic inclusion to billions of people who do not have it today, in the same way that cell phone technology allowed entire nations to leap-frog the landline and land in a technology realm and achieve communications that would be unthinkable, Bitcoin can do the same for banking and finance. It can empower billions of people around the world, in areas such as remittances, international finance, international credit, accessing liquidity, accessing loans, and things like that. As with any technology, this technology will reflect society and it will be a tiny, tiny, tiny minority will try to use it for evil. But I have full faith that the law enforcement capability, properly exercised, can follow funds on Bitcoin just as they can in the normal financial networks. Probably more so than they can in traditional financial networks. Furthermore, I think Bitcoin is the most open and transparent of cryptocurrencies. There are already 500 others. I believe that if Bitcoin is not given the opportunity to work in a way that empowers people, eventually criminals will move to far more stealthy and far less open currencies and use those instead.
SENATOR GREENE (28:35) This is without question the most interesting topic we’ve looked at since I’ve been a member of the committee. One of the things I was thinking of last night as I was reading your paper, the idea that occurred to me, and I want you to comment on it, is that Bitcoin and related currencies is not hackable because there is nothing to hack. Is that a true statement? I wonder if it is, if you could explain that in simple terms. I imagine there are a lot of people watching this.
ANDREAS (29:18) Individual Bitcoin wallets, my wallet, can be hacked. In fact, we see examples of that. The system as a whole cannot be hacked. The reason I say that with confidence is because of the last five years and especially recently in the last year and a half, with value transferred over that network exceeding $5 billion USD, there has been no shortage of people trying to hack Bitcoin. In fact, if anything what we’ve seen is that Bitcoin has changed the very dynamics of cybercrime and hacking. It has escalated the attacks, it has created a target for hackers that is extremely fluid, that resides on people’s computers, and they have tried to take advantage of that. I know that Bitcoin can’t be hacked simply because many people have been trying nonstop for the past five years and can’t hack it. So there’s a very big different between the system as a whole, which is a dynamic system that responds to hacking attacks, and individual wallets. And I think you see a very similar development timeline as with the Internet. I remember a time when groups of hackers could take down Yahoo! for a day and Microsoft and Google, and they don’t do that anymore. That’s not because they stopped trying. It’s because a dynamic system that is constantly exposed to threatening stimuli will develop resistance and will become more and more resistant to these types of attacks. It becomes dynamically stable and resistant to attack. Bitcoin is not static, it continuously evolves, and it continuously deals with attacks better and better over time.
SENATOR (31:10) You mentioned to a previous questioners that there are 500 other cryptocurrencies. What is the size of Bitcoin is relation to those? Are they major competitors? Or are they copy-cats?
ANDREAS (31:40) I would say for the most part that they are copy-cats. My personal opinion is that the allocation of cryptocurrencies in terms of market size, adoption, usage, etc. follows a long tail or power law curve, where the vast majority is concentrated in a few top, maybe a handful of currencies, and then you have potentially a tail that stretches out to encompass thousands of smaller currencies. The dynamic of being able to create currencies that way creates an environment in which there will be literally thousands possibly tens of thousands of currencies in the future. Only a handful will have economic viability and market value, but that doesn’t change the nature of it. In my opinion people will create currencies the way they create internet memes. So in many cases they will be internet memes. We’ve seen that happen in currencies. What’s happening here is a laboratory of evolution and innovation where new ideas are tested and some of the best results of that are often catastrophic failure on a small scale that informs future designs for Bitcoin.
SENATOR (33:00) It’s amazing. Do you foresee a time when in the interest of economic development or what have you, that a nation state decides to forgo its own currency and adopt Bitcoin?
ANDREAS (33:20) That’s a difficult question because I think the very nature of currency is changing. I think the, if you like, “economy,” or organization that is adopting the currency is the Internet. That’s a transnational entity. I think that have even more important implications for the future than national currencies. Bitcoin is already bigger than some national currencies and in the future it may end up being more important for economic activity than dozens of smaller national currencies. I do foresee that in the future, national central banks may utilize block chain technology to underpin a national digital currency.
SENATOR MASSICOTTE (34:15) Thank you, thank you Chair. Thank you for being with us, it’s obviously very interesting and also very useful. Let me follow up on the question from our chair. Your presentation makes a reference that discourages us from implementing even some form of identification. I think your argument is that it’s always visible, you’re right, the chain is very visible. What you don’t see is who is behind the chain. And that is why I presume that people of illegal objectives are prepared to use it as they apparently are using this mechanism to transfer money and launder money. I gather your argument is that “I recognize that, that is a negative, but please don’t put measures in place to restrict that flow, because the usefulness of those measures to identify whose behind these transfers is less than the use to society for letting these things develop.” Is that accurate? The chain is visible, but not the identity of the persons, which I think is what the Chairman was asking.
ANDREAS (35:25) I recognize two aspects. One, that attempts at imposing identity on Bitcoin will, in my opinion, be ineffective because there will always be channels by which non-identifiable transactions can be introduced, either in Bitcoin or other currencies, while simultaneously removing one of the main advantages. Senator, today I’ve received three automated phone calls from Visa fraud prevention because I used my card in Canada. They’ve been calling me all day. This is something that happens to me every time I travel. It’s a symptom of the fact that, by releasing an identifier that allows others to pull from my account and that ties every transaction I do to every activity I do, I am not only giving up my privacy but endangering my personal financial security every time I use a credit card. This system is non-viable. I watch every few weeks on the news that yet another group has hacked 50 million consumer credit cards and identities lost. For the average consumer, that means months of identity protection and risk. These are the intermediaries who handle our identities and what we have seen over the last two decades is that protecting information security systems in such a way that we can prevent these types of thefts is not possible. The mistake is tying identity to every transaction and creating systems that can continuously draw from our accounts. Bitcoin is fundamentally different. To break that, in order to tie an identity that anyone can easily bypass if they have ill-intent, would not result in protecting us more, but it would result in harming consumers.
SENATOR (37:15) The conclusion being is that you acknowledge that this form of system could encourage money-laundering, but you’re arguing is that you acknowledge that but please don’t do anything about it because the benefits for society for this form of transfer is more important. Is that you argument?
ANDREAS (37:34) My argument is that the invention of block chain technologies acutally allows any of these systems to be used for ill-intent without identity and there’s nothing that can be done to stop someone from.
SENATOR (37:42) So we should not even try to stop it?
ANDREAS (37:47) I think that would harm the vast majority of people who do good with it.
SENATOR (37:50) Now let me talk to you about, I guess I’m a little older than you are, but every time we achieve certain points of life, I’ll look at central banks because I guess we’re the banking committee, we come across new theories every 20 or 30 years about the money supply, or money growth, or control inflation that’s all, or control currency, and we always learn 30 to 40 years later that we got it wrong. Shit happens, in other words [lol]. Having said that, when I look at your algorithm, and you say we’re going to predict the necessary growth of this currency, it’s a form of transfer, and we’ve got a right. But I highly suspect 20 or 30 years from now we’ll say, well you didn’t get it right. Clue me in: what’s the one or two things you got wrong when you project that. Where’s the two things that you can say could have gone wrong and here’s why we may have gotten it wrong.
ANDREAS (38:44) I think what’s useful to understand is that Bitcoin’s monetary policy is just one recipe that is possible. What Bitcoin and other currencies like that allows, is to implement monetary recipes at will and then fix them in place for each one of these currencies. If Bitcoin’s monetary recipe is wrong, people will move to another currency that has the same characteristics of decentralized organization but with a different monetary recipe. It is simply one of the possible choices. I don’t know if it is right or wrong, but I do know what it’s going to be in 30 years exactly. for Bitcoin I can tell you to the millionth decimal point exactly how many currency units will exist in 140 years from now in Bitcoin. What it provides, whether you like that recipe or not, whether you agree with it or not, I provides certainty. It provides predictability. It allows people to adjust their expectations for that. Whether that’s the right monetary policy or not, well, with this new model you can build your own new currency that has a different monetary policy and if its better it gets to win. It’s an open competition.
SENATOR (40:00) The supply is defined via algorithmic formula. But people like the Chairman would have bought this unit, so maybe the supply is limited, but will it be equal to the demand growth? Who knows?
ANDREAS (40:07) Nobody knows.
SENATOR (40:10) And therefore the value fluctuates immensely if you’ve got that wrong. Obviously the purpose of the algorithm is to project as reasonable as they can that future growth. It may not be so. MAYBE THE supply is defined, but not the price. So if you get high fluctuation of value, it’s going to discourage its use.
ANDREAS (40:28) Absolutely. I think at the moment volatility is a reflection of very low liquidity in Bitcoin. But Bitcoin has a very specific recipe and that recipe is to simulate the supply curve of a precious metal like gold. That is the very specific monetary theory. If there is a different monetary theory, you can build a different currency using block chain technology. You could even build a block chain technology currency where monetary supply is defined by a committee of 12 central bankers, and then invite its users to adopt that. It would still be more transparent than our current system of money.
SENATOR WELLS (41:08) Thank you very much Chair, pleased to be here today filling in for someone. We ran into each other earlier today, and you said it was going to be an exciting committee meeting, and it is. Mr. Antonopoulos, thanks for coming and thanks for your statements so far. Who are Bitcoin’s biggest detractors and why are they enemies of Bitcoin?
ANDREAS (41:40) I’m not sure who Bitcoin’s biggest detractors are. I can tell you that I, along with every other passionate advocate I know, started off as a detractor. I think it’s important to note that my initial response to first understanding or to first identifying Bitcoin was “this is nerd money, it can’t possibly work.” In fact, when Satoshi Nakamoto invented Bitcoin and announced it on the Cryptography Mailing List, everyone around him responded in pretty much the same way. The circle of advocates, which is now numbering in the millions, consists entirely of people who started out as very strong skeptics. The difference is, the first time I saw it, that was my reaction. The second time, I read the paper and understood that this was not a currency, it was a decentralized network model for financial security and trust, which allows currency but also allows many other things. That literally blew my mind. Then I understood this was much bigger. So we all started out as skeptics. I don’t know if all of the skeptics become advocates over time, but I do see that most people who look at Bitcoin carefully very quickly understand that there’s a lot more than meets the eye to this.
SENATOR (42:55) So what would be Bitcoin’s biggest threat to growth? Having people overcome fear of their unknowns? Would it be the security aspect? The level of technology available? Or the individual nodes that might not have the security that the whole system has?
ANDREAS (43:15) I think there are some very significant security problems related to the ownership and control of Bitcoin keys and Bitcoin wallets for the end user. The simple truth is that we’ve been doing information security for a handful of decades and as an industry that industry is not very effective at doing it, whether that’s trying to protect credit card numbers or Bitcoin for the end user. The nice thing about Bitcoin is that that risk is compartmentalized, so that there is no systemic risk. Over time I think we’re going to see that more secure mechanisms, like hardcore wallets, such as the ones that are beginning to appear in the market today. So for every problem I see in Bitcoin, as an entrepreneur I simultaneously see tremendous opportunity. If you go back and look at the history of disruptive technology like this, in 1994 there were dozens and dozens of articles about how the Internet would fail because no one would be able to find anything on the Internet. You know, Sergei Brin and Larry Page decided that was an opportunity, not a problem. I think with Bitcoin, each one of these problems also is possibly a very innovative new financial industry that can offer solutions.
SENATOR (44:33) I have one more question Chair, if I may. So of the millions of users of Bitcoin currently, who would constitute the biggest user group? International financial transactions, or what? Who is the biggest user now?
ANDREAS (44:45) Well, honestly, I think there are a few statistical surveys that provide some insight into that. I’m not sure about the exact numbers. I think the most common use for Bitcoin is charitable giving, donations, and tipping. I would say probably the demographic at the moment is very similar to the early Internet, which is a very narrow demographic of technology professionals. There is a lot of nerds in this space. I can say that for sure. But it just follows the same path as any other technology. It’s becoming more and more broadly appealing to a broader demographic over time. For me, the most interesting thing is not what Bitcoin can do for Western developed countries because we have fairly sophisticated banking systems. I am fascinated by the idea of being able to deploy Bitcoin on a Nokia feature phone in Kenya and Lagos, Nigeria and bringing online to a global economy people who have never had access to financial services with international credit and who can now be connected to everyone else in the world on an equal footing. That is very exciting to me and I think that’s where the greatest need lies that Bitcoin can fulfill.
SENATOR RINGUETTE (46:10) Thank you, Chair. Most impressive, and I guess when you started out by saying that you spent 20 years working on networks and data centers for financial services companies, all of the sudden I say, they must be in dire need to hire you back. With all of the knowledge that you have gathered about cryptocurrencies, what would be your guestimate to develop and create a similar cryptocurrency?
ANDREAS (46:55) I’m not sure I understand the question.
SENATOR (47:00) As you said, there’s like 500 different cryptocurrencies on the networks. What would be the cause to develop and create a similar cryptocurrency as Bitcoin?
ANDREAS (47:15) Well, every day somebody decides that Bitcoin isn’t the correct answer and they have a better one. They go ahead and choose to try and build a better cryptocurrency. The thing that block chain technology has done is it’s taken the very natural inclination of people to create currency as a form of language, as a form of expression, of value, which exists in every society, whether it’s from prehistoric times with beads and feathers to modern times with company money, company scrip, and all the forms of currency that existed before federal nationalized monopoly money. That possibility of not only creating a currency but that currency being instantly, from its creation, global, secure, fast, predictable, and transparent, that capability means that now a ten year old can create a currency, and that currency can be as secure as the currency created by a monarch a few centuries ago. Just like the Internet brought desktop publishing and communications into the hands of individuals and enabled the capability that previously was the purview only of those who had football field-sized printing presses, the block chain technology has democratized access to currency creation. As a result, anyone with the impulse to create currency for reasons serious to reasons that are completely trivial can now do so. That currency is instantaneously global, secure, and unforgeable.
SENATOR (48:58) And without cost.
ANDREAS (49:00) And without cost. You can go on to a website and create the Ringuettecoin today for a fifth of a tenth of a Bitcoin, or a very small amount. Very soon that will be free. I do anticipate that you will see coins created by children, by performers, by entertainers, by football teams, and most of these will only have entertainment effect or entertainment value but some of them will surprise us and cross into the realm of economic value. It changes the fundamental economic relationship between individuals and the use of currency as a form of expression.
SENATOR (49:43) You said while individual Bitcoin wallets can be targeted and compromised if not properly secured, how can one properly secure its Bitcoin wallet?
ANREADS (50:00) With great difficulty right now, and great technical skill. Which is one of the issues that needs to be addressed over the next many years in order to make Bitcoin more accessible to mainstream users. Right now, it’s difficult to do so because our computer systems are not designed to secure money that has taken pure digital form and resides on, say, your iPhone or your desktop computer. For experts and specialists there are new devices that come out, for example, wallets that are completely embedded in hardware, small devices that you plug into your computer where all of the Bitcoin keys are held only on that device. I actually print out my Bitcoin keys on paper and I put them in a fire-proof safe and I store a second copy in a bank safe deposit box – which is ironic because I’m securing my Bitcoin by putting it in the vault of a bank. But to that, making it physical actually allows me to impart the greatest form of security that I know how to use, because physical security is something that we’re familiar with. Information security is actually being accelerated because of Bitcoin. A lot of innovation is happening in that space which is very exciting.
SENATOR (51:25) Third question. You indicated that a person could acquire a loan in bitcoins. How would one go about that?
ANDREAS (51:35) There are already organizations that are implementing a concept called peer-to-peer lending, which exists in the traditional currencies. For example, in the traditional currencies there are companies like lendingclub.com, where I can go out and make a loan to a fellow American and they will end up paying a lower interest rate than a credit card and I’ll actually get a higher interest rate than I would with a certificate of deposit. If I diversify my loans enough and only invest a small amount in each loan, I can suffer a pretty low default rate. That model can now be taken globally. I can lend money with Bitcoin, and there are companies already doing this, to someone anywhere in the world. In fact, in that case, I would invest perhaps in 2 to 3 thousand different loans so that default on one loan wouldn’t affect my entire amount and diversify my risk that way. This has tremendous implications for worldwide credit. It not only allows people in the developing world to source credit, but it also allows people in the developed world to invest their money directly with the borrowers without intermediaries, at must lower cost. It’s already happening.
SENATOR (52:50) But you have an intermediary. You have this organization that directs what you’re prepared to loan and the people that are wanting to acquire a loan. So you have this…
ANDREAS (53:15) Today we do, yes. But with Bitcoin, this is one of the tremendous things that’s happening. Many of the traditional financial services can now be redesigned and reenvisioned in a completely decentralized fashion without intermediaries. This concept of disintermediation, or removing intermediaries, and connecting directly buyers, seller, consumers, lenders to creditors, consumers to merchants, without intermediaries is the magical power of Bitcoin, that’s what this invention has allowed us to do without having to establish trust first. So with Bitcoin we can have a completely decentralized market for credit and lending that is simultaneously global, near instantaneous, and that allows access to a vast pool of credit. That’s a very exciting prospect.
SENATOR (54:10) If Canada would move forward and put some regulation, as some witnesses have asked of us, and the world did not follow, the G-7 countries did not follow in similar regulation, what would be the pros and cons of such a move?
ANDREAS (54:40) Well that’s very interesting, because already we see tremendous regulatory fragmentation. We have a regulator in New York state that has taken initiative to do regulation based on NY state law, regulation that looks very very similar to traditional banking regulation and is not very well suited for Bitcoin. Simultaneously there will be other forms of regulation. So in the US, we’re likely to end up with a patchwork of state, local, and federal regulation. I think you’re going to see similar attempts in many countries. Bitcoin technology is such that it can operate across borders very very effectively, and therefore Bitcoin companies can migrate to the area of least friction and can create the jobs and the innovation and the growth in the places where regulation is best informed about the nuances and particular needs of Bitcoin companies. So I think Canada and other countries that are looking at this regulation very carefully, rather than rushing into it, have an opportunity to create an environment that is very friendly to those countries and attract one of the industries that quite frankly is creating thousands of jobs today which cannot be said of too many other industries.
SENATOR MEREDITH (56:05) Thank you so much Chair. Thank you for your presentation. As I read your notes last night, as a segue to what my colleague just raised with regard to regulations, our committees here in the Senate looking to put forward recommendations in a report to the government that will fully become law to protect Canadians. You talk to us about individuals being hacked. Companies who you cited earlier have spent millions and millions of dollars on their security architecture to protect that data that’s been provided by their consumers. We see how vulnerable they are and how this data has been lost, major banks have come and indicated that they’ve been hacked months later to the surprise of their consumers whose credit cards and data is out there. And now you’re advocating a decentralized system, when the traditional banking system is predicated on all of these security measures put in place to protect consumers. We’re about protecting Canadians. Bring it back as to how we would do that going forward with Bitcoin and what you’re proposing. I understand the rationale of access, especially when it comes to, say for example, Africa, and the outlying areas we’ve seen in the revolution of cell phones, and how that has changed the dynamics of communications as well as transactions. So talk to us about the security aspect of how we would go forth with respect to protecting Canadians who are engaged and who will become engaged in more transactions going forward.
ANDREAS (57:55) One of the big failures of regulation in the traditional environment is that with centralized identifiers and centralized regulation come centralization of risk. So when an organization such as Home Depot or Target is hacked and they lose 60 million consumer identities, the reason that represents such an enormous impact is because they were storing 60 million user identities in the first place. Instead, if each one of those 60 million consumers had to be individually attacked, targeted, and hacked successfully, the possibility of that happening is much, much lower. So the advantage of a decentralized environment is that there is no central repository, or motherlode, or cache, or vault, where everyone’s identity is stored and therefore everyone’s identity can be attacked at the same time. Bitcoin proposes a different model, where the risk and the control are pushed out and put in the hands of the users. The result of that is that it makes a system that is much more resilient to systemic risk. However, that means that the user themselves have enormous power and with that they have enormous responsibility. That control exposes them to individualized risk.
SENATOR (59:29) How do we mitigate that risk?
ANDREAS (59:31) That risk is already being mitigated by innovations. On the one hand, you have this increased exposure of the individual one-by-one, but on the other hand, we have programmable money. The fact that it is programmable money allows us to invest completely new models for security, wehteher those are specialized devices that control keys and never expose them to an internet environment, whether that is multisignature transactions, where in order to release funds, a number of signatures are required to release those funds, those signatures could belong, perhaps, to two different devices that the user carries, so they simultaneously need to authorize a transactions from their laptop and their mobile phone, which gives them a greater degree of security. You could have secondary or tertiary controls stored on paper or on a device that’s kept offline, in a vault, at home, in a fire-proof safe, whatever. Those are the basic things we’re doing right now. Based on these technology, you’re already seeing companies that are providing services to consumers, where they will look at every transaction a consumer is making and provide a third signature to authorize that transactions based on a risk assessment. In that case, that company has no custodial control over the funds. They can’t take the user’s funds. All they can do is sign or not sign that transactions. They’re providing a risk check and just that. These are very interesting models that we’ve never explored before because either the user did not have enough control, or the network was not open enough to allow experimentation and access. The technology wasn’t flexible enough. I have great faith, already just in the last two years as this technology ash gone mainstream. The amount of innovation around that exact problem has accelerated so much that we’re gradually beginning to win in terms of protecting end user wallets. In this environment specifically, requiring the users to attach identity to every transaction and then put all of those in a central repository, just like the regulations in New York have demanded, to me is folly, because it takes away the one opportunity we have to think of a different way of doing this and exposes back again to the same systemic risk of centralized points of failure risk that we have with credit cards. I’m hoping that the market is allowed to develop these solutions.
SENATOR (1:02:20) Going forward, my colleague Senator Black raised a point with respect to “breathing time,” and you indicated this as well, but what would be a suitable timeframe for us to be able to look, obviously this is evolving, this is developing. However, we believe that there has to be some sort of regulations put in place to govern, similar to what we have in place with the Internet in terms of privacy and in terms of requests for information and so forth. With respect to the breathing time, and if we were to enact some sort of legislation. Give us your opinion as to what that would look like, to govern Bitcoin, and its transactions.
ANDREAS (1:03:00) I think that if we look at the experience with the Internet, the opportunity for the Internet to develop its own models for self-regulation was extremely effective, because it delivered a lot of good to a lot of people. In fact ironically, when the US Senate finally came around to regulating spam was the same year that technology solved the problem. In some cases, waiting is the better option. I don’t think there’s a major problem with consumer access to Bitcoin at the moment, in terms of the risk it poses to consumers. However, there are particular areas where I believe your committee could offer clarity. The first one is making a clear distinction between centralized custodial accounts and decentralized models of Bitcoin operation, and not lumping them together. Centralized custodial accounts are dangerous to consumers. They expose consumers to the exact same risk as a centralized financial institutions, only in this particular case there is zero oversight or control over these institutions because they operate outside of the banking environment. So, for example, when CA Vertex came here and asked for regulation in that environment, that is a very sensible idea, because CA Vertex has complete control of the user’s keys and operates in the traditional centralized custodial manner. However, I think leaving opportunities for the development of decentralized solutions and recognizing that those are either subject to the same risks for consumers, nor do they need or can use effectively the same types of regulation as custodial accounts, would open up a lot of possibility for innovation in that space. I think also it’s important to carve out exceptions; for example, there are exceptions already in existing law in terms of personal use of small amounts of exchanges. For example, if I exchange a small amount of USD for Canadian dollars on the street corner, I’m not going to be arrested for operating without a money transmitting license. I think it’s important to recognize that on a small scale, and for personal use, there should be clarity in the law that makes it clear that you don’t require licenses to operate for personal uses. Consumers are not subject to banking regulation. That would be very useful for the development of this technology.
SENATOR (1:05:45) One final question. You indicated about the “bad actors,” the small percentage that are in there. What systems do you currently have in place to deal with those individuals who would abuse the system?
ANDREAS (1:06:00) Traditional law enforcement has been tremendously successful in tracking and stopping such activities in the network, again and again. So far I haven’t heard of any particular need for changing the way the network operates. In fact, such a request would be met with no change because this is global network that isn’t under the control of a single individual. I don’t control Bitcoin any more than anybody else controls Bitcoin. The network itself provides a level of transparency that law enforcement can use.
SENATOR HERVIEUX-PAYETTE (1:06:55) Can you tell me whether there are countries at the present time that recognize and supervise the bitcoins?
ANDREAS (1:07:00) [staring into space intensely] I believe that there are several countries in which Bitcoin use has been recognized in many different ways, at different levels of the legislative process or judicial process. In terms of recognizing in fact that Bitcoin is money, that it is subject to the same rules and regulations around taxation and operation, that it also carries certain liberties such as freedom of association and freedom of expression. Within many countries, Bitcoin fits comfortably within the existing system for currencies. However, I don’t know that has required specific legislation or that any country has legislated specifically for Bitcoin.
SENATOR (1:07:55) A question on a matter that was raised previously. If Senator Ringuette were to issue a Ringuettecoin this week, and if our chair had his Bitcoin for a number of months already, I’d like to know what the value of one in relation to the other would be?
ANDREAS (1:08:18) [internal monologue: what am I doing with my life?] The various currencies that exist out there are related to each other based on a free floating market rate. That market rate is determined by trade between individuals on exchanges where those currencies can be sold and bought for each other. This is exactly the same mechanism with which the exchange rate between the Canadian dollar and the US dollar is determined, or between any currency in the modern world. All of these currencies have a free-floating market value. I would argue that with that, if there is very low liquidity in that market, it will be very difficult to establish a price that is representative of the value of that currency. Price discovery will be difficult and in fact will lead to very, very large volatility. As Bitcoin and other currencies get larger, the volatility decreases. In fact, the volatility of Bitcoin today is not at all dissimilar from the volatility of oil during the first decade of the discovery that oil could be used as a substitute fuel, instead of say whale oil, that was used at the time. We see this with new technologies when the market develops. It starts off with tremendous volatility, but over time, as the amount of volume and liquidity in the markets increases, the volatility is reduced until these currencies become extremely stable. For a global currency, a $5 billion valuation is tiny. I would expect that Bitcoin will remain volatile for many years to come.
SENATOR (1:10:10) I think that Senator Ringuette can give some thought then to this $5 billion. There was a subject that was discussed, namely the matter of security in the use of bitcoins. WE are parliamentarians here, and we are doing this study within a parliament that, after this particular committee, I’ll be sitting on the finance committee. I’d be interesting knowing when it comes to the control that governments might be able to exercise if all operations are conducted in Bitcoin and the value is constantly changing. How would a government be able to exercise its “fiscal power”?
ANDREAS (1:10:50) [cannot believe this is happening] The citizens of that government would exercise direct control over the currency through their own purchasing decisions through direct ownership and control over their own units of currency, so in many cases, as I mentioned before, Bitcoin is not unregulated. It is regulated both by mathematics as well as dynamic markets that exist among its participants and users. Both the price of Bitcoin, its value in commercial transactions, and the use to which its put, is managed directly by the end user and those end users arguably are the same constituents. If the constituents can apply direct control over the currency, they will do so.
SENATOR (1:11:40) My last question. We talked about the value in the month of June and we’ll be making our tax return in April. What value would be used if we wanted to be able to make a conversion for tax authorities? Of course it is necessary to file a tax return. It is necessary to establish a value, and if there is a serious amount of fluctuation, I realize that the quantities are not high. There aren’t that any taxpayers that have huge incomes. Let’s say the average Canadian earns $45K a year. What is the value that would be attributed to the revenue for January, February, March and so forth, how would it be possible to monitor and control this type of declaration of income or revenue?
ANDREAS (1:12:38) That’s a very interesting question, and one area where regulatory clarity would be extremely useful. I earn the vast majority of my income directly in Bitcoin. Since October of last year, I have earned very little in terms of national currencies. I get paid in Bitcoin and I pay many of my expenses directly in Bitcoin. For the purposes of taxation, I treat the Bitcoin as earnings in the form of currency, just as if I was doing contract work for a European company and being paid in Euros. I will assess the market value of the transaction when I earn the income at that current market price and then I will render taxes to the tax authority in the national currency, which is after all the primary power of the tax authority, is to force the users to pay in the currency of their choice. What becomes difficult is that in the case of use of currency, the classification in the tax code depends on the use I have. For example, if I use my brokerage account to purchase Euros for investment purposes, and I sell those Euros two months later and realize a gain, I will be subject to capital gains tax upon that gain. However, if I visit Paris and I use Euros to pay for a ticket to the local Paris zoo, and the price of the value of Euro changes between the moment I purchase that amount with my own currency and the moment I paid for the ticket, I’m not assess a capital gains tax. It’s considered a currency use, and therefore it is treated differently. The tax code is flexible enough to allow me to declare the appropriate use for the appropriate tax classification, depending on how I use it. Now, at the moment in the US at least, there’s been a ruling that says Bitcoin operates as a commodity with capital gains taxation, which is, in my opinion, the wrong answer. However, if Bitcoin had been classified purely as a currency, that would have been the wrong answer too. The correct answer, in my opinion, is that it depends on how it is used. If it is used for long-term investment, then obviously it is subject to capital gains taxation. If it is used for consumer spending, then it operates as a currency and means of exchange. The tax system allows me to declare upon honor how I’ve used the currency, and to then impose penalties if I have made that declaration incorrectly. That’s how it works with every other currency. This is an area where clarity would be extremely useful, because it would allow us to use currencies such as Bitcoin In the same way that we use currencies all over the world.
SENATOR TKACHUK (1:15:35) Welcome, thank you for your talk here today. It has been an interesting afternoon. The other virtual currencies, are they based on an algorithm as well? Is it the same one as used for Bitcoin?
ANDREAS (1:15:58) There are several algorithms within Bitcoin. There is a central invention, which is the block chain, and the security model that uses consensus through proof-of-work, which is a technology that allows a network to arrive at a secure picture of what the current ledger is, based on competition. That central technological innovation is used in the vast majority of currencies, I’ll call that the block chain invention. However, there are other algorithms in Bitcoin, such as the algorithm that determines how currency is issued, how often, and how much of the currency is issued. Other currencies have taken different perspectives, so they’ve used a different monetary policy recipe. We’ve seen a very broad range of those choices. For currencies that are far more inflationary in nature, with much bigger supplies of currency, even to currencies that implement a demurrage interest rate, meaning a negative interest rate that encourages consumption and discourages savings. In fact, as a laboratory, these currencies can express a very broad range of monetary policies and even political perspectives. The underlying invention, however, that secures the entire network, is the same almost exactly the same, across all of these currencies.
SENATOR (1:17:20) We’ve heard in previous testimony about the “miners,” the ones who actually issue the currency, or mine the currency. There were some stories in the paper in June of this year where a company had over 51% of the mining market for Bitcoin. It was developing like a quasi-monopoly. Does it have the ability to develop a total monopoly? Can one company develop a total monopoly in issuing bitcoins? Does that jeopardize the whole currency itself? Is there controls on that? How does that work?
ANDREAS (1:18:14) I think it’s important to emphasize the fact that the purpose of mining is to secure and verify all transactions. The reward for mining is currency issuance. Let’s not confuse the reward for the main purpose. Mining is rewarded with currency issuance for securing the network. The reward acts as an incentive to ensure that the network remains secure. The company in question, which is a mining organization, it operates as a pool, similar to a lottery pool. This means that they didn’t control the hashing directly, they acted as a central location whereby many, many independent miners could pool their hashing power and put it behind this in order to achieve a smoother return on their hardware investment. Where playing the lottery by yourself, you may win but on a very irregular schedule, if you play as part of a pool, you get more frequent, but lower, payments. In a similar way, because mining is a competitive function, individuals do not fare well. They get very volatile payments. Instead, they pool their actions together. Interesting, when GHash approached, but did not reach, the 51%, they reached the high 40’s, this led to a market response. The market response was such that individual miners, recognizing the potential risks to the reputation, at least, of the network (although I don’t believe it was a serious technical risk), withdrew their mining capacity from that pool operator and redirected it to other pool operators. Shortly thereafter, GHash had their cumulative mining power drop to, at the moment, being slightly below 30% of the total power of the network. Which provides a very good level of protection against individualized attacks, because that’s a very big amount, but at the same time it’s not big enough to provide a monopoly. On a technical note, a mining pool or individual miner achieving the majority of the network can potentially disrupt the transaction processing function of the network for the short term. However, what they cannot do is they cannot steal funds from any of the users, they cannot redirect funds from any of the users, and they cannot invalidate transactions from the users. They can only delay them, delay the processing. So it’s not as big a risk as most people believe it is. Because of the market mechanisms behind it, we have seen again and again that it is a self-correcting system.
SENATOR (1:21:00) Just so I can understand, whether it’s just a method of exchange, or it’s an actual currency sold? If I have yen in Canada, I can’t really buy anything, I can to go to a bank and exchange it because no one takes it. I need to get Canadian dollars so that I can buy something. It’s the same in each country. In each country, those dollars have certain value, so even though my Canadian dollar trades up and down as compared to the USD, and so does everybody else, I still deal in Canadian dollars. It basically stays the same for Canadian products, unless it depends heavily on imports. Does the virtual sphere itself have its own sort of stability? In other words, when something is priced in Europe for 1 BTC and I have 1 BTC, can I buy that for 1 BTC even though the value of that Bitcoin has changed in relation to the currency of my country or the American dollar?
ANDREAS (1:22:20) The exchange rate between Bitcoin and individual currencies such as the Euro, Canadian dollars, USD, etc., has sufficient liquidity that, in fact, arbitrage is possible between the various exchanges. Meaning, that the purchasing power of 1 BTC is the same no matter what the national currency. The fluctuations are miniscule because any serious fluctuation, if I could buy Bitcoin cheaper for Canadian dollars and then sell it more expensively for USD, that creates an immediate opportunity for arbitrage between the two markets. That’s exactly what’s happening. In fact, arbitrage in Bitcoin in many cases is even more effective because the Bitcoin can be transferred between exchanges almost instantaneously and across borders, whereas in traditional financial markets, moving money like that takes a bit longer. The differences between national currencies even out very, very quickly and there are not fluctuations. My Bitcoin purchasing power, while volatile overall, is the same across any national currency.
SENATOR (1:23:25) [mind blown] Can you see a time, or is that where we’re heading, where internationally, things will be priced in bitcoins? Or bought and sold in bitcoins, no matter what’s happened underneath to national currencies? Only because you save so much money in exchange, is that where we’re going?
ANDREAS (1:23:55) I believe in the long term, Bitcoin will be stable enough in terms of volatility that it will be possible to price things directly in Bitcoin . At that moment, Bitcoin becomes almost a universal currency in terms of its utility across the internet. At least on the internet, that would make it extremely competitive against national currencies, both in terms of ease of use and flexibility. I would expect that to happen. However, I think we’re several years away before the volatility of the currency is such that things can be priced directly in Bitcoin.
SENATOR (1:24:30) One more question. Bitcoin can be stored. Say Senator Gerstein when he buys, I don’t know where he keeps his Bitcoin. Where does he keep his bitcoin? Does he keep it in his own wallet? Or is there a virtual wallet where you keep your bitcoins? You can do that?
ANDREAS (1:24:55) So this may be a tiny bit too technical, but I’ll provide you with some insight anyway. The bitcoins are actually not stored by individuals, but they’re stored on the network on the public ledger. So the public ledger stores the bitcoins. What the Senator has is the keys, which allow him to sign for transactions, essentially signatory control over those funds to unlock them. How you store the keys depends. There are many ways to store the keys. Effectively they’re just numbers. For my protection, I actually print those out on pieces of paper and put them in a physical medium. I also have keys that control smaller amounts of Bitcoin, kind of “spending change” if you’d like, on my mobile phone. I have some on my desktop and I also have some on hardware devices that I’m trying out. The vast majority I keep printed out on physical copies because it’s more secure. Those can’t be hacked, you actually need to break into my house.
SENATOR (1:25:50) Do you know what companies do or businesses do, with so many multiple transactions, there may be thousands or millions a day for all I know. Can bitcoins adapt to that? Can you pay payroll of a thousand people or 500 people or 200 people easily with bitcoins? Do the deductions and all the rest of it with them?
ANDREAS (1:26:15) Not only can you do that, but a medium-skilled programmer can do that in a few hundred lines of a programming language like Python, accessing the entire financial network and instructing it to do that. This is fascinating, but not only that, but they could do that with transactions to a thousand people living in a hundred different countries, which is almost impossible to do with today’s money. If you try to do payroll, and there are many companies in the technology space, for example, Google pays tens of thousands of affiliate companies for advertising revenue. The cost to them to paying these companies for that revenue across the world is enormous. The possibility of automating that and using a single currency for electronic payments, it can be done, it can be done extremely fast, it can be done extremely efficiently, and it can be done globally. And very cheaply.
SENATOR MALTAIS (1:27:20) First of all a short comment and some questions. I agree with my colleague Senator Campbell when he says that people of a certain age might have some trouble trying this out. We did have a Chair generously bought $100 worth of Bitcoin and told us about it. I don’t know what has become of it. I don’t know whether there’s been a loss, but of course that’s not your problem. You said that a user of a Bitcoin might be able to predict what the monetary supply might be in the future. If a user of a Bitcoin, for example, such as the Chair’s, is able to predict what the monetary supply will be 30 years from now, it seems to me that the Minister of Finance should probably have made use of this for the next five years or whatever. It seems to me that if you are certainly able to tell what the money supply will be in 30 years, then this is very useful knowledge.
ANDREAS (1:28:50) Typically, because it is designed to simulate the extraction of precious metals in its progression, it is entirely possible with very high accuracy exactly how much currency will be available on the market at a specific period of time. That doesn’t necessary mean that the supply will meet the demand, or that it is the correct supply, it’s just that we know what that supply will be. I would argue that today we are able to predict with a very high degree of accuracy what the supply of gold will be over the next year because it has now been extracted at a very predictable rate. It’s similar with Bitcoin.
SENATOR (1:29:30) On that particular point, I think that any insurance company actuary when they establish an annuity over a period of 30 years, for example, are able to make a good prediction for the figures that will probably turn out to be quite realistic. They don’t need Bitcoin in order to establish what the money supply will be in 30 years. They’re able to make an extrapolation, it’s a very simply mathematic formula, and this can be done by an actuary. But there is question that I find quite puzzling. Do you think that the Bitcoin system would duplicate the present banking system? The banks are able to adapt to any type of new technology. The world banking association, I think, that when it comes to capital are probably investing more in technological research on digital currency, than Bitcoin could ever be.
ANDREAS (1:30:45) Bitcoin is, or rather the invention behind Bitcoin, the block chain technology, is an invention that will have a substantial influence over the future of banking. In fact, I have had several discussions with banks that are very interested in using similar systems in order to create more efficient networks within the banking system. For example, today a lot of clearing operations, such as those for worldwide fund transfer, or clearing stock and equity purchases, are handled by intermediaries. Bitcoin would allow banks to handle those in a decentralized network by simulating the same technology as Bitcoin on their own. Furthermore, banks in the developing world are very interested in using Bitcoin to extend services to areas where they can’t deploy infrastructure. I think very similarly to how telecommunications companies at first were somewhat threatened by the internet but now run their entire networks on top of the internet, banks will eventually find ways to utilize this technology and I would not be surprised if very big parts of the financial services systems eventually run on top of technology very similar to Bitcoin, perhaps Bitcoin itself.
SENATOR (1:32:13) Do you not have the impression that you were swallowed up before you even came into existence because the banks will never, ever let you have so much operating scope. I’m not talking just about Canadian or American banks, I’m talking about banks in the world. I don’t think that the banks will let this go by without reacting. I realize that this is quite successful, young people are very enthused about it, but I don’t think that banks are going to let themselves be dispossessed because Bitcoin is not a solid organization for the time being, it’s simply a virtual one.
ANDREAS (1:33:05) The exact same discussion when the idea that the international telecommunication union would be thwarted or somehow threatened by this nascent technology called the Internet was ridiculous on its face. The idea that world leaders would allow the internet to give people freedom of expression was preposterous. The idea that the Internet would be allowed to subvert the will of despots around the world and would not be instantaneously shut down whenever they felt it was threatening their authority was preposterous. Yet all of these things have happened. I believe that Bitcoin, by empowering individuals, and especially individuals who do not even have access to the banking facilities that we’re talking about, will create a thriving economy of its own, and an economy that will not threaten banks but will open new opportunities for banks. In the end, just like the telecommunication companies, many of their old models will be fundamentally disrupted, many of their old profit sources will be fundamentally disrupted. Today, ATT’s long distance network has been completely decimated and Skype has dominated that space. Yet ATT did not give up, they became the world’s largest ISP. Eventually, I believe, Bitcoin-like currencies will decimate certain industries, especially high-profit, low-service industries such as international remittances, which are exploitative in their nature. However, they will open up new industries, new products, and new services. The economic activity that will be enabled by connected billions of people on an interconnected global financial system is so much bigger than the potential risk that this may post to the profits of incumbents.
SENATOR GERSTEIN (1:35:20) In your comments, which have been just fascinating, you’ve made reference to the fact that one of the great motivators to you, personally, in getting involved with this is the technology that is going to bring to people that don’t have it today, and I think you used the term “it will empower billions around the world.” If I’m correct, I believe Mr. Gates in his charitable giving in Africa is making use of a digital currency called M-Pesa. Could you just expand a little on what you see the impact or the implications of Bitcoin or M-Pesa or digital currency in general will have in terms of Africa?
ANDREAS (1:36:05) Absolutely. M-Pesa is a fascinating study for those of us who are interested in digital currencies because it has shown what is possible when low-friction digital money is introduced into an environment without the need for massive infrastructure, in environments that don’t have banking services well-developed. M-Peas was started as an experiment that allowed individuals to transfer cell phone minutes amongst themselves and their families by a telecom provider in Kenya. I imagine the moment this became a currency was a very mundane moment; such as, for example, a customer arriving at a store and realizing they didn’t have sufficient money to buy a dozen eggs, and saying “Well, can I give you a couple of cell phone minutes instead?” With that simple concept, a currency is born. What’s fascinating about M-Pesa is we roll forward just 12 years and M-Pesa is no responsible for 40% of the GDP of Kenya. That is a staggering amount. It represents the adoption of what was largely an underground cash-based economy and one that was illiquid, inflexible, and very slow to operate. Turbo-charging that by providing enormous liquidity and fluidity into the economic system. At the moment, Bitcoin is not ready to be adopted easily on the most deployed platform in the world, which is a Nokia feature phone, the Nokia 1000, of which there exists billions. It requires a bit more infrastructure than that, but gradually, we see two trends converging. One is that Bitcoin is being applied on simpler and simpler technology and we already see its use through SMS, text messaging. The other one is the collapse in the costs of producing smart phones, with the Android approaching $25. There are already applications in the Bitcoin space that would allow a single Android phone to support thousands of simple SMS customers and give them Bitcoin wallets, which would allow essentially a young kid in Lagos, Nigeria to buy an Android smartphone and become a bank serving thousands of customers, simultaneously giving them access to the equivalent of an Western Union terminal, a credit facility for buying loans, as well a trading facility for all of the world’s markets. This off a simple Android phone and simple SMS feature phones. M-Pesa shows us that it is possible. Bitcoin now makes that phenomenon global. When we talk about the unbanked, the World Bank estimates that 2.5 billion people are completely unbanked, living in cash-based societies. However that vastly underestimates the problem because if you look at the types of banking facilities we have in the Western world, the ability that I have to access a brokerage account with access to any of the international markets to convert any currency I want without controls, to transmit money to any country in the world that I want, again, with very little controls, and to use it as a simple consumer is very, very, very far removed from what most people have. If you look at the unbanked as those who have a single currency only, closed account that doesn’t have access to international markets, credit or trading capabilities, more than 6 billion people in the world live with that kind of banking. 2.5 billion of them are completely unbanked. Bitcoin can change that environment dramatically in less than a decade.
SENATOR BLACK (1:39:50) I’d like to again thank you for this contribution. It’s extremely helpful. I’d like to move to a couple of final points that I want clear in my mind. I want to take from your comments arising from what Senator Ringuette asked, that we’ve been exploring throughout this hearing the opportunity that may exist for Canada, for innovation, if we get this right. Can you succinctly tell us what you think that opportunity is?
ANDREAS (1:40:20) I think there are two aspects to this. One is the pure research and technology innovation capabilities that might exist in the Bitcoin sphere. One of the things I like to emphasize is that Bitcoin is not just money for the internet. To look at it simply as money for the internet is to miss the point. Bitcoin is the internet of money. Currency is just the first “app.” Currency is an app running on the decentralized trust network based on the block chain technology, which means that many other apps will exist. The Bitcoin currency is almost the same as e-mail was in the nineties. It enabled the growth of the internet. It was the killer application that made it viable and worthwhile for people to get involved. But it couldn’t possibly open our eyes to the endless possibilities that came afterwards; the web, we couldn’t envision that in the early 90’s, or even Facebook and things like that, and Twitter. Bitcoin, the currency, is just the tip of the iceberg. It is the proto-technology that really brings this decentralized network of trust to consumers, but there will be other apps. It’s already evolving at a tremendous rate. From a pure research and innovation perspective, I think it’s incredible. The other thing is to think about the possibilities of extending banking services. Even though Canada has a highly-banked population, there are still pockets within this country. I know that in the US close to 18% of the population have very limited banking capabilities. That is probably true of most developed nations. There are pockets within this country where people have very little access to banks. I think the combination of doing primary research and innovation in these new technologies and opening banking to reach different corners of this country and disadvantaged parts of the population, that is a very potent combination. Especially if we take advantage of the international aspects of this currency.
SENATOR (1:42:30) One last question from me. How did New York state get it wrong?
ANDREAS (1:42:35) I think they got it wrong in many ways. First of all, by rushing to regulate very soon. More importantly, by regulating Bitcoin in exactly the same way that the banking system currently operates and failing to see the distinctions between Bitcoin and the current system. The only analogy I can think of is if in the proto-Internet, the FCC in the US had decided that the Internet was simply a sophisticated form of CV radio and required a license from every website operator. Such an outcome would have almost certainly destroyed the Internet industry in the US. However, because of the enormous need for such a tool, it would not have affected the Internet industry everywhere else. It would have simply pushed that innovation elsewhere. Treating Bitcoin as a proto-bank account with some fancy features is to miss the point. Regulating then as such completely stifles it. It puts it immediately into the playing field of incumbents. It ties them up in the same kinds of regulations, and it forces us to behave more like a bank when its unique characteristics is that it isn’t a bank.
SENATOR MASSICOTTE (1:44:10) One technical question then a more important question. On the technical side, many countries have promised themselves sales tax, and they’re comfortable with sales tax, if merchants use this currency, is there a software that [???] is easy to apply the sales tax? Does that already exist?
ANDREAS (1:44:35) Absolutely. In fact, it’s easier with Bitcoin because the public ledger provides a complete record of all of the transactions. It’s as if all of my bank statements from the first moment I use Bitcoin are online. I render sales tax to the state of California for the business I ran selling products via Bitcoin. I also pay my income tax in USD based on my income which is entirely in Bitcoin and I do all of my accounting using traditional accounting software.
SENATOR (1:45:00) So the software is in place? The calculations are immediate?
ANDREAS (1:45:08) Yes, although it is rather cumbersome at the moment, because the modalities are quite different. For example, in my normal traditional banking, I have a handful, 4 or 5, different accounts. In Bitcoin, I have well over 2,000 accounts, because with Bitcoin it makes sense to create a new account for every transaction. It’s not really an “account,” and therefore if you try to put it into the same model, it’s difficult to work. However the software is being developed.
SENATOR (1:45:34) The way I see it, this is a highly secure form of transfer. An anonymous form of transfer of property, you can call it “currency,” but you’re using it now as a currency in the sense of bartering. It seems to me this could be very, very useful in many things, including exchange of property. Today we have a bunch of lawyers and notaries who acknowledge these same transfers. It seems this application can be used very, very often in many, many different facets. Five years forward, how do you see this technology being used to benefit our society? Give me some examples.
ANDREAS (1:46:10) There are some very interesting applications where the decentralized ledger is used as a public record of sorts for all kinds of things. From registering bicycles to registering automobiles to registering company shares. Two days ago I was at a Bitcoin conference where a couple was married. Their marriage was registered on the block chain for the first time. They used the block chain as the registrar of that contract. You could use it to register titles and deeds for property and transfer those titles and deeds for any form of property, including vehicles, real estate. With a simple electronic transaction, you can transfer the deed to a car. Even better, and more importantly, the car could look up its own title and render itself useable to the new owner automatically. This concept is called “smart property,” where the property recognizes its ownership through reference to the block chain. All forms of decentralized registration can be implemented through the block chain. Furthermore, you can issue share certificates, or any other form of token that can be traded from sharing my bandwidth and receiving a token in return that I can spend to use somebody else’s bandwidth, creating the possibilities for a sharing economy similar to how we do AirBnB or sharing cars today. We could do many of these things using digital tokens. There’s a company here in Toronto who developed an application that allows you, upon submitting a transaction on the block chain, to unlock a door, for example, for an AirBnB apartment. Your smartphone would make the payment and also unlock the door to the apartment and have access to that property.
SENATOR (1:48:00) I don’t understand why they used the block chain for a couple getting married, why, is he scared to get mixed up with the wife? What’s the issue?
ANDREAS (1:48:10) It was largely symbolic, and a proof-of-concept. This couple was already married under traditional state laws. However, what they wanted to do was record their marriage on a record that was publicly accessible, unforgeable, and completely unchangeable through time. It provides a permanent record of what has happened, an unalterable history that within an hour is completely unalterable by anyone. It will be preserved through history because of the value of the transactions that occur.
SENATOR GREEN (1:49:00) I take your point about the dangers of inappropriate or premature regulation, because we don't know where this is heading and the pace of change is large. We don’t want to influence, I don’t think, the pace of change, or what it might lead to. We have to write a report. The report will have recommendations. My question is, what would your reaction be to just a report with one recommendation, and that recommendation would be that there be no regulations and that we revisit this in, say, 5 years?
ANDREAS (1:49:45) I think that would be a very good idea. I think there is some room for clarification. Clarifying, for example, the tax status for individuals, or at least clarifying the right of an individual to make a choice in the currency they use as a consumer and to affirm the legality of using digital currencies in all forms of commerce as entirely equivalent with any other national currency. Recognizing the private form of barter in transaction, recognizing the corresponding principles which I consider neutral principles, but they are principles of Enlightenment, which are freedom of association, freedom of expression, freedom of conscience. I think that removing ambiguity in that particular arena for personal use would be enormously useful.
SENATOR GERSTEIN (1:50:40) Mr. Antonopolous, your reputation preceded you prior to your arrival. You may recall that in my introductory remarks, I did not introduce you as a Bitcoin guru, but as THE Bitcoin guru. I think that I could speak on behalf of all of the members of the committee in saying that you have more than lived up to that reputation. We greatly appreciate your presentation today. Thank you very much, this meeting is concluded.