Video - Andreas M Antonopoulos Educates Senate of Canada About Bitcoin
In Canada, the public debate surrounding Bitcoin and cryptocurrencies is currently being formalized as the official “Study on the use of digital currency”, a consultative exercise conducted at the initiative of the Senate of Canada’s Banking, Trade and Commerce committee.
Although the Senate of Canada exerts less authority than the House of Commons, its standing committees have proven to be an influential source of expertise and opinion. It also enjoys considerable international attention: according to Stuart Hoegner, general counsel at the Bitcoin Alliance, “no other parliamentary body in the world has publicly canvassed the breadth of materials and opinion that this committee has”.
MR. GERSTEIN: Fiat currency and BitPay, a payment system for Bitcoin. Last week the committee returned to hearing witnesses directly involved with one of the digital currencies, Bitcoin. The Bitcoin Embassy, the Bitcoin Alliance of Canada and the Bitcoin Foundation. Today we are pleased to welcome Mr. Andreas Antonopoulos considered to be the Bitcoin Guru. Suggested to us by several previous witnesses, Mr. Antonopoulos is both an entrepreneur and author in the field of Bitcoin. He is a Computer Science graduate from University College, London. His expertise includes Bitcoin, cryptocurrencies, information security, cryptography, cloud computing, data centers, Linux open source and robotics software development. He has had over 200 articles published and print and is syndicated worldwide. In addition, he is a certified information system security professional for over12 years and is a permanent host on Let's talk Bitcoin, a webcast devoted to Bitcoin. Mr. Antonopoulos is also a prolific public speaker. Recently appearing at the Toronto Bitcoin Expo held earlier this year which I must tell our committee, our analysts attended. He has literally, members of the committee, written the book on Bitcoin which is entitled Mastering Bitcoin, unlocking digital currencies. It is with great pleasure that I turn the floor over to Mr. Antonopoulos for his opening remarks to be followed by your astute questions. Mr. Antonopoulos, welcome. The floor is yours, sir.
MR. ANDREAS: Thank you, Chair and Committee members. I appreciate the opportunity to contribute to these proceeding about digital currency. My experience is primarily in information security and network architecture. I have a Master's degree in networks 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've 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 seems like contrary concepts.
Traditional models for financial payments networks and 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 clearing house. As a result, 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 entity is near the center of a traditional financial network are vested with enormous power, act with full authority and therefore must be very carefully vetted, regulated and subject to oversight. 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, lacks oversight, corruption and in the end financial crises.
Bitcoin and other digital currency based on the blockchain architecture are fundamentally different. The security model of blockchain 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. 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 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 on unsecured systems without fear of compromise. 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 to 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.
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 a chain of supposedly vetted intermediaries who must 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. Because in Bitcoin trust is not vested 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 oversights 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. The 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 often placed outside of democratic oversight. A Bitcoin user can predict the monetary supply 30 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 a week hence.
Bitcoin decentralized architecture does 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, audits 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 are 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.
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 disruptive 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 to a chain of intermediaries will only replicate the failures of the past by introducing single points of failure into a network that has none. 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 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, hardware 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 this committee.
MR. GERSTEIN: Well, thank you, Mr. Antonopoulos for your opening remarks. They have clearly resonated, stimulated a number of questions. But before I turn it over to senators for questions, I thought I just might make an observation. In your remarks, you have told the committee that the decentralized security model of blockchain currencies is indeed secure. And that the 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 from anonymous -- because of the anonymous and open nature of Bitcoin. I think you 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 to this committee. Would you have any comments on that and perhaps it may want to be picked up by some of the senators in their questions as well?
MR. ANDREAS: 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 participants 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. Furthermore, I think Bitcoin is not a very convenient network for such uses. The vast majority of such activities really occur with cash, in fact, with the US dollar and 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 and I think that use far outweighs the tiny minority that might put such currencies to illicit use.
MR. GERSTEIN: Well, thank you for those comments. With that I'm going to start with my list. Yes.
MALE: (Inaudible 00:14:54) question try to explain how it all works so we can try that or --
MR. GERSTEIN: When it's his turn we'll return to (Inaudible 0:15:00) for that. Senator Black, to be followed by Senator Campbell.
MR. BLACK: Thank you very much, Mr. Chairman. And thank you very much Mr. Andrew Antonopoulos. Thank you very much, Mr. Andrew Antonopoulos for being here we're -- I'm finding very real 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. So that's my premise right or wrong. And 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 like to see Bitcoin regulations put in place a 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 have stated the 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.
MR. ANDREAS: 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 multi-signature escrow has many more flexible ways of responding to the need for consumer protection. For example, in the traditional banking environments 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 note 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 or end user is the only one with full control over the money. To 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. And so 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're no longer protected by the blockchain. They are now in a gray area where they're not covered by regulatory requirements for capital adequacy audits, security requirements and controls, etcetera. But they're also not covered by Bitcoin security model. And 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 essentially as a risk manager to ensure that even if the user's systems are compromised their 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 user's funds has been centralized than that institution puts consumers at risk. But to lump a decentralized model where user still has full control over their funds and an institution can't steal their money under that same regulation is not only misguided but doesn't leave any room for that technology to develop further.
MR. BLACK: 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?
MR. ANDREAS: 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 multi-signature transaction where there can be up to twenty different signatories on a single transaction and a transaction can be controlled by any mixture of signatures that technology was introduced in 2012, four years after the introduction of Bitcoin and 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 those nuances can create niches where new players can come into the financial services market and introduce innovation competition and quite honestly disruption into the banking industry by trying out new models for consumer protection which in my opinion are superior to the ones we have today.
MR. BLACK: So your answer is what in terms of what this committee should do if anything?
MR. ANDREAS: Wait until the technology is better understood by all of us and understand that there are nuances in this technology that require very careful treatments because a blanket treatment as if this is just a currency which it is not. It is a network for money. A treatment as if there is only one application the Bitcoin currency, which it is not. There are many applications based on this model would stifle this technology in its early days.
MR. BLACK: Thank you very much. Thank you, Mr. Chairman.
MR. GERSTEIN: Thank you, Senator Black. Senator Campbell to be followed by Senator Greene.
MR. CAMPBELL: Thank you, Chair and thank you so much for coming today. I remember when I got an IBM Electronic that have the X backspace so I could correct letters and I thought nothing is ever going to be cooler than this. It's impossible. And that's my, you know, I'm 67 that's my generation. Would it be fair to say to you and you say it needs some breathing space? I'm asking you would it be fair to say that the younger generation gets this more so than my generation?
MR. ANDREAS: With any new technology, I think, that's the case.
MR. CAMPBELL: And you think it fair to say for instance I would doubt very much that I will get into Bitcoins. I don't really understand it even still and we're on our eleventh meeting and --
MALE: We're lucky Paul does.
MR. CAMPBELL: Yes. Senator Massicotte does. And but I know that when I talk to people, younger people about this committee 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 and in fact, I've been told to keep my old nose out of it. Because and I think you explained it. How much time does it take to breathe for this? How long do you think that would be? I mean, how rapid is this going to come upon us?
MR. ANDREAS: I would estimate that Bitcoin today is approximately in the same position that the Internet was in 1992. And in 1992 when I used email it required command line UNIX skills typed into a mainframe and it was very, very difficult.
MR. CAMPBELL: Yes.
MR. ANDREAS: 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 some while until the technology went from something extremely esoteric that was only the purview of someone working in a computer science department until my mother could do it with a swipe of her finger and she's a self-acknowledged technophobe. And so it may take some time. What I can tell you for sure is I think this one is going to be about three times 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 eight 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.
MR. CAMPBELL: Okay. One more question. The question I have is that if you don't need any centralized oversight. Who provides, I mean, you say well, the front end user and the end user controlled it, control the whole thing. If there is nobody finding out who is the front end user how can be so sure that we won't see ISIS or one of these other whack job crews use this as a method of transferring money around the world?
MR. ANDREAS: I firmly believe that the possibility for positive use of this technology so far outweighs the 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 the 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 leapfrog the landline and land in a technology realm and achieve communications that would be unthinkable. Bitcoin can do the same for banking and finance and 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. And as with any technology, this technology will reflect society and there will be a tiny, tiny, tiny minority who will try to use it for evil. But I have full faith that the law enforcement's capabilities 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 cryptocurrency. There are already five hundred others. And 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.
MR. CAMPBELL: Okay. Thank you very much for coming today. Much appreciated.
MR. ANDREAS: Thank you.
MR. GERSTEIN: Thank you. Senator Campbell. Senator Greene to be followed by Senator Massicotte.
MR. GREENE: Thank you very much for coming. This is without question the most interesting topic we've looked at as since I've been a member of the committee. And I'm just amazed by -- one of the things I was thinking about last night as I was reading your paper, the idea that occurred to me was that 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? And I wonder if it is if you could explain that in very simple terms because I imagine there are a lot of people watching this.
MR. ANDREAS: Individual Bitcoin wallets, my wallet can be hacked. And in fact we see examples of that. The system as a whole cannot be hacked. And the reason I say that with confidence is because over the last five years and especially recently in the last year and a half with value transferred over that network exceeding $5 billion 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 if 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 difference 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, and that's not because they stop trying. It's because of dynamic system that is constantly exposed to threatening stimuli will develop resistance and will become more and more resistant to these types of attacks. A concept often called anti-fragile. It becomes dynamically stable and resistance to attack. And Bitcoin is not static it continuously evolves and it continuously deals with attacks better and better over time.
MR. GREENE: Thanks very much. It's very interesting. You mentioned in the answer to the previous questioner that there are roughly five hundred other cryptocurrencies. What is the size of Bitcoin in relation to those? Are they major competitors or are they copycats?
MR. ANDREAS: I would say the most part they're copycats. My personal opinion is that the allocation of cryptocurrencies in terms of market size, adoptions, users, etcetera 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. And the dynamic of being able to create currencies at whim creates an environment where there will be literally thousands, possibly tens of thousands of currencies in the future. Only a handful will have economic viability and markets 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 there will be Internet memes and we've seen that happen in currencies. So 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.
MR. GREENE: 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?
MR. ANDREAS: That's a difficult question because I think the very nature of currency is changing. And so I think if you like economy or organization that is adopting the currency as the Internet and that's a transnational entity. I think that has even more important implications for the future than national currencies. Bitcoin is already bigger than some national currencies and in the future 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 blockchain technology to underpin national digital currency.
MR. GREENE: Great, thank you.
MR. GERSTEIN: Thank you, Senator Greene. Senator Massicotte to be followed by Senator Wells.
MR. MASSICOTTE: 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. In fact, your presentation makes a reference that you discourage us from even recommending some form of identification and I think your argument is that -- your argument is it's always visible. You're right, the chain is very visible. But what you don't seem in the chain is who is behind the chain. And that is why I presume people of illegal objective are prepared to use it as they apparently are using this mechanism to basically transfer money and launder money. I gather your argument is that I recognize that. That is a negative but please don't hesitate with that issued, don't put measures in place to restrict that flow because the usefulness of those measures identifying who's behind the transfers is lesser than the use to our society for letting this thing develop. Is that accurate because the chain is visible but not the identity of the persons which is what I think the Chairman was asking.
MR. ANDREAS: I'm recognizing 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 will simultaneously remove one of the main advantages. Senator, today I've received three phone calls, automated phone calls from Visa Fraud Prevention because I use my card in Canada. They've been calling me all day and this is something that happens to me every time I travel and is the symptom of the fact that by releasing an identifier that allows others to pull from my account and the 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 had fifty million consumer credit cards and identities lost. And for the average consumer that means months of identity protection at 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 and 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.
MR. MASSICOTTE: But 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 a thing about it because the benefits for society from this form of transfer is more important. Is that your argument in principle I gather that's what you're saying?
MR. ANDREAS: My argument is that the invention of blockchain technologies actually 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 --
MR. MASSICOTTE: Or should even try to stop it?
MR. ANDREAS: I think that that would harm the vast majority of people who do good with it.
MR. MASSICOTTE: Okay. Now let me talk about, you know, I guess we're a little bit older than you are but and every time we achieve certain points in life if you look -- I'll look at central banks because that's I guess we're a banking committee. They come across with newly theories every 20-30 years about how the money supply or money growth or control inflation that's all. They're controlled currency and we always learn 30-40 years later well, sorry we got it wrong and then things like shit happens in other words. So having said that when I look at your algorithm and you sort of say we're going to predict the necessary growth of this currency, it's the form of transfer. And we've got it right. But I highly suspect 20-30 years when I say well, you didn't get it right. Now clue me in. What's the one that you things you got wrong when you say that when you project the future? Where is the two things of weakness you say I could have got it wrong and here is where I may have gotten wrong?
MR. ANDREAS: I think what's useful to understand is that Bitcoin's monetary policy is just one recipe that is possible. And what Bitcoin and the other currencies like that's allow us is to implement monetary recipes at will and then fix them in place for each one of these currencies. And 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 current units will exist in 140 years from now in Bitcoin. And so what it provides whether you like that recipe or not whether you agree with it or not it provides certainty. It provides predictability and 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 currency which has a different monetary policy and if it's better it gets to win. It's an open competition.
MR. MASSICOTTE: The supply is defined, given the algorithm formula. But people like our Chairman would buy it, have bought this unit. So maybe the supply is limited. But it will be equal to the demand growth who knows and therefore --
MR. ANDREAS: Nobody knows.
MR. MASSICOTTE: -- that price of that currency may fluctuate immensely if you got that wrong. Because obviously the purpose of the algorithm is to project as reasonably as they can that future growth but it may not be. So maybe the supply is defined but not the price. And therefore, if you got high fluctuation of value it's going to discourage its use.
MR. ANDREAS: Absolutely. And I think at the moment volatility is a reflection of very little liquidity in Bitcoin. But Bitcoin has a very specific recipe and that recipe is to simulate the supply curve over precious metal like gold. And that is a very specific monetary theory. Now if there is a different monetary theory you can build a different currency using blockchain technology. You could even build a blockchain technology currency where monetary supply is defined by a committee of 12 central bankers and then invite users to adopt that. It would still be more transparent than our current system of money.
MR. MASSICOTTE: Thank you, Chair.
MR. GERSTEIN: Thank you. Senator Wells to be followed by Senator Ringuette.
MR. WELLS: Thank you very, very much, Chair and pleased to be here today filling in for someone and as we ran into each other earlier today. And you said it was going to be an exciting committee meeting and it is. Mr. Andrew Antonopoulos, thanks for coming and thanks for your answer so far. Who are Bitcoins biggest detractors and why are they enemies of Bitcoin?
MR. ANDREAS: I'm not sure who are Bitcoin's biggest detractors. I can tell you that I along with every other passionate advocates I know started off as a detractor. I think it's important to note that my initial response to first understanding or 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 crypto 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 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. And that literally blew my mind and then I understood this was much bigger. So we all started out as skeptics. I don't know if all 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 that meets the eye to this.
MR. WELLS: So what would be Bitcoin's biggest threat to growth would be 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?
MR. ANDREAS: 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. Overtime I think we're going to see the development of more secure mechanisms like hardware wallets such as the ones that are beginning to appear in the market today. And so for every problem I see in Bitcoin as an entrepreneur I simultaneously see a tremendous opportunity. I think if you go back and look at the history of disruptive technologies like this in 1994 there were dozens and dozens of articles about how the Internet would fail because no one would be able to ever find anything on the Internet. You know, Sergey 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.
MR. WELLS: Okay. Thank you. I've 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 like who is the biggest user now or the highest plurality?
MR. ANDREAS: Well, honestly, I think there are a few statistical surveys that provide some insights into that. I'm not sure about the exact numbers. I think the most common use for a Bitcoin is charitable giving, donations and tipping. And 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's 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, in Lagos, Nigeria and bringing online to a global economy, people who have never had access to financial services with international credit. And who could 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.
MR. WELLS: Okay. Thank you. Thank you, Chair.
MR. GERSTEIN: Thank you Senator Wells. Senator Ringuette get to be followed Senator Meredith.
MS. RINGUETTE: Thank you, Chair. Most impressive and I guess when you started out by saying that you spent 20 years working on network and data centers for financial services company. All of a sudden I say, they must be in dire need to hire you back. So --
MALE: He's not for sale.
MS. RINGUETTE: No, but with all the knowledge that you have gathered about cryptocurrency what would be your guesstimate to develop and create a similar cryptocurrency?
MR. ANDREAS: I'm not sure I understand the question.
MS. RINGUETTE: Well, you know, as you said there is like 500 different currencies on the networks. What would be the cost to develop and create a similar cryptocurrency as Bitcoin?
MR. ANDREAS: Well, every day somebody decides that Bitcoin isn't the correct answer and they have a better one, and they go ahead and choose to try and build a better cryptocurrency. The thing that blockchain 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's 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 10-year-old can create a currency and that currency can be as secure as the currency created by a monarch a few centuries ago. So 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 a football field sized printing presses. The blockchain technology has democratized access to currency creation. And as a result, anyone with the impulse to create currency for reasons serious to reasons that are completely trivial can now do so. And that currency is instantaneously global, secure and unforgeable. So --
MS. RINGUETTE: And without cost.
MR. ANDREAS: -- and without cost. In fact, you can go on to a website and create the Ringuette coin today for a fifth of a tenth of a Bitcoin and for a very small amount in any case and very soon that will be free. And 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. So it changes the fundamental relationship between individuals and the use of currency as a form of expression.
MS. RINGUETTE: Second question and I have -- okay. You said while individual Bitcoin wallets can be targeted and compromised if not properly secured, how can one properly secure its Bitcoin wallet?
MR. ANDREAS: 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 printout 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 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 and a lot of innovation is happening in that space which is very exciting.
MS. RINGUETTE: Okay. Third question. You indicated that a person could acquire a loan in Bitcoin and how would one go about that?
MR. ANDREAS: Well, 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 to make a loan to a fellow American and they will end up paying us a lower interest rate than a credit card. And I'll actually gets an interest rate that's higher than I would with a certificate of deposit. And 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 global. And I could lend money with Bitcoin and there are companies already doing this to someone anywhere in the world. And in fact, in that case I would invest perhaps in two, three 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 because 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 --
MS. RINGUETTE: Yes, instead of being -- yeah.
MR. ANDREAS: -- with the borrowers without intermediaries at much lower cost and it's already happening.
MS. RINGUETTE: Yeah. But you have an intermediary. You have this organization that, you know, kinds of directs what you're prepared to loan and the people that are wanting to acquire a loan. So you have this --
MR. ANDREAS: Today, we do. Yes, indeed but with Bitcoin this is one of the tremendous things that's happening is that many of the traditional financial services can now be redesigned and envisioned in a completely decentralized fashion without intermediaries. This concept of disintermediation or removing intermediaries and connecting directly buyers to sellers, 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 and that's a very exciting prospect.
MS. RINGUETTE: Okay. What would -- from your perspective and Chair, it's my last question. If Canada would move forward and put some regulation as some witnesses have asked of us and that the world did not follow, you know, the G-7 countries did not follow in similar regulation, what would be the pros and cons of such a move?
MR. ANDREAS: 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 New York State Law, a regulation that looks very, very similar to traditional banking regulation and is not very well suited for Bitcoin. And simultaneously there will be other forms of regulation. So in the United States we're likely to end up with a patchwork of state, local and federal regulation. And I think we are 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 companies and attract one of the industries that quite frankly is creating thousands of jobs today which cannot be said for too many other industries.
MS. RINGUETTE: Thank you very much.
MR. ANDREAS: Thank you.
MR. GERSTEIN: Thank you very much. Senator Meredith to be followed by the Deputy Chair Senator Payette.
MR. MEREDITH: Thank you so much, Chair. Thank you so much for your presentation. As I read your notes last night and this segue into what my colleague just raised with respect to regulations. Our committee, our committees here in the Senate looking to put forward recommendations in a report to government that will hopefully become law to protect Canadians. You talk to us about individuals being hacked and companies who you cited earlier have been -- spent millions and millions of dollars on their security architecture to protect, you know, that data that's been provided by their consumers. And we see how vulnerable they are and how they have -- this data has been lost. Major banks have come and you know, 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 the security measures put in place to protect consumers. We're about protecting Canadians. So 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 see the revolution of cell phones and how that has changed the dynamics of communication 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?
MR. ANDREAS: 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 represent such an enormous impact is because they were storing 60 million user identities in the first place. And 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, mother lodes, cash, you know, 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. And 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 individualize risk.
MR. MEREDITH: How do we mitigate that risk then?
MR. ANDREAS: That risk is already being mitigated by innovations. So on the one hand you have this increased exposure of the individual one by one. But on the other-hand we have programmable money. So the fact that it is programmable money allows us to invent completely new models for security whether those are specialized devices that control keys and never expose them to an Internet environment, whether that is multi-signature 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 transaction 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 fireproof safe whatever. Those are really the very basic things we're doing right now. But based on this technology we're already seeing companies that are providing services to consumers where they will look at every transaction the consumer is making and provide a third signature to authorize that transaction based on a risk assessment. Now 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 transaction. They're providing a risk check and just that. These are very interesting models. Models we've never explored before because neither the user had enough control and the network was not open enough to allow this type of experimentation and access. The technology underlying it wasn't flexible enough. So I have great faith already just in the last two years as this technology has gone mainstream. The amount of innovation around that exact problem has accelerated tremendously and we're gradually, I think, beginning to win in terms of protecting end user wallets. So 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 it's folly because it takes away the one opportunity we have to think of a different way of doing this and expose us back again to the same systemic risk of centralized points to failure and risk that we have with credit cards. So I'm hoping that the market is allowed to develop these solutions.
MR. MEREDITH: Going forward, my colleagues, you know, Senator Black raise it with respect to breathing time and you indicated this as well. But what would be a suitable time frame for us to be able to look? I mean, obviously this is evolving, this developing. However, we believe that there has to be some sort of regulations put in place to govern similar to what we've done now with the Internet in terms of privacy and in terms of request 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.
MR. ANDREAS: 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. And so in some cases waiting is the better option. I don't think there is a major problem with consumer access to Bitcoin at the moment in terms of the risk that 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 the exact same risk of a centralized financial institution 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 users 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 neither 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 US dollars for Canadian dollars on the street corner I'm not going to be arrested for operating without a money transmitting license. So 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 and personal use as a consumer, not subject to banking level regulation. Because that would be very useful in allowing further development of this technology.
MR. MEREDITH: One final question, Chair. You indicated about the bad actors and a small percentage of them then and there. What systems do you currently have in place to deal with those individuals who would abuse this system?
MR. ANDREAS: Traditional law enforcement has been tremendously successful in being able to track and stop such activities on the network again and again. And so far I haven't heard of any particular need for changing the way the network operates. And in fact, such a request would be met with no change because this is a global network that isn't under the control of a single individual. I don't control Bitcoin any more than anybody else controls Bitcoin. So the network itself provides a level of transparency that law enforcement can use.
MR. MEREDITH: Thank you. Thanks, Chair, thank you so much.
MR. GERSTEIN: Deputy Chair of the Committee Senator Payette to be followed by Senator Tkachuk.
MS. PAYATTE: (French language)
INTERPRETER: Thank you. In view of the fact that I haven't -- no one has spoked in French so far I'll be putting my question in French. Can you tell me whether there are countries at the present time that recognized and supervise the Bitcoins?
MR. ANDREAS: 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 with it also carries certain liberties such as freedom of association and freedom of expression. And so within many countries Bitcoin fits comfortably within the existing system for currencies. However, I don't know that that has required specific legislation or that any country has legislated specifically for Bitcoin.
MS. PAYATTE: (French language)
INTERPRETER: A very short question on the matter that was raised previously. If Senator Ringuette were to issue a Ringuette coin this week and if our Chair had his Bitcoin for a number of months already. I'd like to know what they're value of one in relation to the other would be?
MR. ANDREAS: So the various currencies that exist out there are related to each other based on a free floating market rate. And that market rate is determined by trade between individuals on exchanges where those currencies can be sold and bought for each other. But this is exactly the same mechanism with which the exchange rate between the Canadian dollar and the U.S dollar is determined or between any currency in the modern world. So 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. And 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 where as the market develops. It starts off with tremendous volatility. But overtime 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. And so I would expect the Bitcoin will remain volatile for many years to come.
MS. PAYATTE: (French language)
INTERPRETER: I think that Senator Ringuette can give some thought down to this five billion. There was a subject that was discussed namely the matter of security in the use of Bitcoins. We are parliamentarians here we are doing this study within a parliament. After this particular committee, I will be sitting on the Finance Committee. I'd be interested in knowing when it comes to their control, that governments might be able to exercise if all the operations are conducted in Bitcoin and the value is constantly changing how would a government be able to exercise its fiscal power?
MR. ANDREAS: While the citizens of that government would exercise direct control over the currency through their own purchasing decisions. And through ownership 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 exists among its participants and users. Both the price of Bitcoin, its value in commercial transactions and the use to which it's put is managed directly by the end user. And those end users arguably are the same constituents. So, if the constituents can apply direct control of the currency, they will do so.
MS. PAYATTE: (French language)
INTERPRETER: My last question then. We've talked about the value in the month of June and we'll be making our tax return in April. What the value would be used if we wanted to be able to make a conversion for tax authority because that 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 realize that the quantities are not high. Many taxpayers have huge incomes. Let's say the average Canadian earns a forty-five thousand a year. What would the value of a would be attributed to the revenue from January, February, March and so forth how would it be possible to monitor control this type of declaration of revenue?
MR. ANDREAS: 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 and 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 a foreign currency. Just as if I was doing contract work for 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 become 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 purchased that amount with my own currency in the moment I paid for the ticket. I'm not assessed capital gains. It is considered a currency use and therefore, it is treated differently. And 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 United States at least there's been a ruling that says that 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 I thought I would have been the wrong answer too. The correct answer in my opinion is it depends on how it is used. If it is used for long term investment then it is subject to obviously capital gains and losses. If it is used for consumer spending then it operates as a currency and means of exchange. And 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. So, 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 from all over the world.
MS. PAYATTE: Thank you.
MR. GERSTEIN: Thank you. Senator Tkachuk to be followed by Senator Maltais.
MR. TKACHUK: Thank you for your testimony here today. It has been an interesting afternoon. The other virtual currencies, are they based on an algorithm as well and is it the same one as used for Bitcoin?
MR. ANDREAS: There are several algorithms within Bitcoin. There is a central invention which is the blockchain 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 blockchain invention. However, there are other algorithms in Bitcoin such as the algorithm that determines how a currency is issued, how often and how much of the currency is issued. Other currencies have taken different perspectives. So they use a different monetary policy recipe. We've seen a very broad range of those choices from currencies that are far more inflationary in nature with much bigger supply of currency even to currencies that implement a demarche interest rate meaning and negative interest rate that encourages consumption and discourages savings. So, 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 almost exactly the same across all of these currencies.
MR. TKACHUK: We have heard in previous testimony we heard about the miners. People who actually I think they're the ones who actually issue the currency or mine the currency. Is there a net -- there were stories in the paper in June of this year where a company had over 51% of the mining market for Bitcoin. So, it was developing like a quasi or does it have the ability to develop a total monopoly? Can one company develop a total monopoly in issuing Bitcoins? And then does that jeopardize the whole currency itself? How do you have control -- is there controls on that? How this at all work?
MR. ANDREW: So, 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 and not to confuse the reward for the main purpose. Mining is rewarded with currency issuance for securing the network and 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 which 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 smoother returns on their hardware investment. So 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 so instead they pool their auctions together. Interestingly when GHush approach but did not reach 51% but they approached the high forties this led to a market response. And the market response was such that individual miners recognizing the potential risk 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 GHush.IO had their cumulative mining power dropped to at the moment being slightly below 30% as 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 a 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. And because of the market mechanisms behind it we have seen again and again that it is a self-correcting system.
MR. TKACHUK: Just so I can understand whether it's just a method of exchange or it's a natural currency. If I have Yen in Canada I really can't really buy anything. I have to go to a bank and exchange it for because no one takes it. So I have to go to a bank and exchange it for Canadian dollars so that I can buy something. And it's the same in each country and each country those dollars have certain value. So even though my dollar trades my Canadian dollar trades up and down as compared to the US dollar so does everybody else. I still deal in Canadian dollars. And it basically stays the same for Canadian products unless it depends heavily on imports and all the rest of it. So does the virtual sphere itself have its own sort of stability in other words when something is price in Europe for one Bitcoin and I have one Bitcoin can I buy that for one Bitcoin even though the value of that that going has changed in relation to the currency of my country or the American dollar?
MR. ANDREAS: The exchange rate between Bitcoin and individual currencies such as Euro, Canadian dollars, U.S dollars etcetera has sufficient liquidity that in fact arbitrage is possible between the various exchanges. Meaning that the purchasing power of one Bitcoin is the same no matter what the national currency fluctuations are miniscule because any serious fluctuation if I could buy Bitcoin cheaper for Canadian dollars and then sell it more expensively for U.S dollars that creates an immediate opportunity for arbitrage between the two markets and that's exactly what's happening. In fact, arbitraging Bitcoin in in many case 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. So the differences between national currencies even out very, very quickly and there are no fluctuations. My Bitcoin purchasing power while volatile overall is the same across any national currency.
MR. TKACHUK: So can you see a time or is that where we're heading? We're internationally people's things will be priced in Bitcoins and bought and sold in Bitcoins no matter what's happening underneath to national currencies. Only because you save so much money in exchange and you know, all the rest of it. Is that where we're going? Is that where we're heading?
MR. ANDREAS: 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. And so I would expect that to happen however I think where several years away before the volatility of the current is such that things can be priced directly in Bitcoin.
MR. TKACHUK: Okay. Could I have time for one little more question. Bitcoin can be stored. Say Senator Gerstein he buys I don't know where he keeps his Bitcoin. You keep it in your own wallet or do you keep. Or is there a virtual wallet where you keep your Bitcoins? You can do that?
MR. ANDREAS: So this may be a tiny bit too technical but I'll provide you with some insights anyway which is that the Bitcoin are actually not stored by individuals. They're stored on the network on the public Ledger. The Public Ledger knows who has and hasn't Bitcoin. What Senator Gerstein has is the keys which allow him to sign for transactions essentially signatory control over those funds.
MR. GERSTEIN: To unlock it.
MR. ANDREAS: To unlock them. How you store the keys depends. There are many ways to store the keys effectively they're just numbers. So from 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 like on my mobile phone. I have some on my desktop and I also have some on hardware devices that I'm trying out. But 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.
MR. TKACHUK: As you know, companies will do or businesses do so many multiple transactions. They may do thousand, million a day for all I know. Can Bitcoin adapter to that? Can you pay all of the thousand people or five hundred people or two hundred people easily with Bitcoins to the deductions and all the rest of it. Without or is it a issue people are doing?
MR. ANDREAS: Not only can you do that people. 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. Which 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. So 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. And the cost to them, to paying these companies for that revenue across the world is enormous. So the possibility of automating that and using a single currency for electronic payments. It can be done extremely fast. It can be done extremely efficiently and it could be done globally.
MR. TKACHUK: I like it.
MR. ANDREAS: And very cheaply.
MR. GERSTEIN: Senator Maltais please.
MR. MALTAIS: (Foreign language)
INTERPRETER: Thank you, Mr. Chairman. First of all, a short question, comment and some questions. I agree with my colleague Senator Campbell. When he says about the people of a certain age I might have some trouble trying this out. We did have a machine and generously abought a $100 worth of Bitcoins he never told us about it. I don't know what he's become of it. I don't know whether there's been a loss but of course that's not your problem. You said the user of a Bitcoin might be able to predict what to the monetary supply might be in the future. If a user of a Bitcoin for example such as the Chair is able to predict. What are the monetary supply in thirty 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 you are certainly if you're able to tell what the money supply will be in thirty years then this is very useful knowledge.
MR. ANDREAS: In the case of Bitcoin specifically because it is designed to simulate the extraction of precious metals in its progression. It is in fact entirely possible to predict with very high accuracy exactly how much current you will be available on the market at a specific period of time. Now that doesn't necessarily mean that that supply will meet that demand or that is the correct supply. It's just that we know what that supply will be. I would argue that today we can't predict to 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. So, similarly with Bitcoin.
MR. MALTAIS: (Foreign language)
INTERPRETER: On that particular point. I think that any insurance company actuary when they establish an immunity over a period of thirty years for example, are able to make a good prediction for the figures of that to probably turn out to be quite realistic. So they don't need a Bitcoin. In order to establish what the money supply will be in thirty years. There are able to make an extrapolation it's a very simple mathematical formula and this can be done by an actuary. But there's a question that I find quite puzzling. Do you think that the Bitcoin system it would duplicate the present banking system? The banks are able to adapt to any type of new technology. And the World Banking Association I think when it comes to capital probably investing more in technological research, on digital currency than Bitcoin could ever be.
MR. ANDREW: Point is or rather that, the invention behind Bitcoin the blockchain 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 world wide 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 that 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.
MR. MALTAIS: (Foreign language)
INTERPRETER: And this leads me to ask you then. Do you not have the impression? That you were swallowed up before you even came into existence and because the banks will never ever let you have so much operating a scope on -- not talking just about Canadian or American banks I'm talking about banks in the world. I don't think that the banks are willable to 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 the banks are going to let themselves be just possessed. Because a Bitcoin is not a solid organization for the time being. It's simply a virtual one.
MR. ANDREAS: The exact same discussion when the idea that the International Telecommunications Union would be thwarted or in somehow threatened by this nascent technology called the Internet was ridiculous on its face. The idea that world leaders, states would allow the Internet to give people freedom of expression was preposterous. And the idea that the Internet would be allowed to subvert the will of the asphalt surround the world. And would not be instantaneously shut down whenever they felt it was threatening their authority was preposterous and yet all of these things have happened. I believe that Bitcoin by empowering individuals and especially the 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 disruptive, many of their old profit sources will be fundamentally disrupted. Today AT&T's long-distance network has been completely decimated and Skype has dominated that space. Yet, AT&T did not give up. They became the world's largest Internet service provider. And 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, new services. An economic activity that is enabled by bringing together billions of people on a fully connected global financial system is so much bigger than the potential risk that this may pose to the profits of incumbents.
MR. MALTAIS: Thanks, Chair.
MR. GERSTEIN: This concludes round one but we're going to enter into round two and I have at the moment Senator Black, Senator Massicotte and Senator Greene on my list. Before turning it over to Senator Black, in your comments, what you've been just fascinating you made reference to the fact that one of the great motivators to you personally in getting involved and this is the technology that is going to bring to people that don't have it today. And I think you use the term it will empower billions around the world. If I am correct I believe Mr. Gates in his charitable giving in Africa is making use of a digital currency called M-Pesa.
MR. ANDREAS: Correct.
MR. GERSTEIN: 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?
MR. ANDREAS: 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 and environment that doesn't have banking services well developed. And M-Pesa 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. And with that simple concept a currency is born. What's fascinating about M-Pesa is we roll forward just twelve years and M-Pesa is now responsible for forty percent of the GDP of Kenya. That is a staggering amount. And it represents the adoption of what was largely an underground cash-based economy and one that was illiquid, inflexible and very slow to operate. And 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 exist billions and so 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 cost of producing smartphones with the Android approaching $25. The already applications of 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 a Western Union terminal, a credit facility for buying loans as well as a trading facility for all of the world's markets. And this off a simple Android phone and S.M.S feature phones. M-Pesa shows us that it is possible a Bitcoin now makes that phenomenon global. And when we talk about the unbanked, the World Bank estimates that two and a half billion people are completely on bank living in cash basis 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 I want, again, with very little controls and to use it has a simple consumer is very, very, very far removed from what most people have. And so 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 six billion people in the world live with that kind of banking. And two and a half billion of them are completely unbanked. Bitcoin can change that environment dramatically in less than a decade.
MR. GERSTEIN: Thank you. Senator Black to be followed by Senator Massicotte please.
MR. BLACK: Thank you very much, Mr. Chairman. I just like to again thank you for this contribution extremely helpful. I want to move to just 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 through 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?
MR. ANDREAS: Well, 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'd like to emphasize is that Bitcoin is not just money for the Internet and 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 a decentralized trust network based on the blockchain technology which means that many other apps will exist. The Bitcoin currency is almost the same as email was in the 90's. 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 vision that in the early 90's or even Facebook and things like that today and Twitter. So Bitcoin the currency is just the tip of the iceberg. It is the Pro technology that really brings this decentralized network of trust to consumers. But there will be other apps and it's already evolving at a tremendous rate. So 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 and even though Canada has a highly banked population, there are still pockets within this country. I know that in the US close to 80% of the population have very limited banking capabilities. And 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.
MR. BLACK: Thank you very much and one last question if I may, Mr. Chairman. How did New York State get it wrong?
MR. ANDREAS: I think they got it wrong in many ways. First of all, by rushing to regulate very soon, but 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 Federal Communications Commission in the United States had decided that the Internet was simply a sophisticated form of C.B. radio and required a license from every website operator. And 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 ever where else. It would have simply pushed that innovation elsewhere. I think treating Bitcoin as a proto-bank account with some fancy features is to miss the point and regulating it then as such completely stifles it. It puts it immediately into the playing field of incumbents, it ties them off in the same kinds of regulations and it forces us to behave more like a bank when its unique characteristic is that it isn't a bank.
MR. BLACK: Thank you very much, thank you, Mr. Chairman.
MR. GERSTEIN: Thank you. Senator Massicotte to be followed by Senator Greene.
MR. MASSICOTTE: Thank you, thank you again. One technical question that are more important question. On a technical side, many countries and promises of sales tax and coupled with income tax. For the merchants using your currency, is there already software already in place? One of my dollar cents cash registers got pretty sophisticated. Is that really existing that it's easier than duty counting. It is sales tax, collect the sales taxes does that already exist?
MR. ANDREAS: Absolutely, in fact it's easier with Bitcoin because the public ledger provides a complete record of all of the transactions. As it is if all of my bank statements from the first moment I use Bitcoin are online. I render sales tax the state of California for the business I ran selling products via Bitcoin. I also pay my income taxes in U.S. dollars based on my income which is entirely in Bitcoin and I do all of my accounting using traditional accounting software.
MR. MASSICOTTE: And your software is in place for the transfer, the calculations immediately.
MR. ANDREAS: Yes, although it is rather cumbersome at the moment. Because the modalities are quite different. For example, in my normal banking, traditional banking, if you like or have a handful four or five different accounts. In Bitcoin, I have well over two thousand 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 so.
MR. MASSICOTTE: Let me talk to you about you basically answered the question. But the way I see it, this is a highly secure form of transfer, anonymous form of transfer of property. You can call it currency. But using enough for a currency from a sense of bartering. But I presume you're talking about. It seems to me this could be very, very useful in many things including exchange of property that a way of a bunch of lawyers or notaries who acknowledge they safe transfer of real estate property. But it seems to me this application could be used very, very often in many, many different facets. So let's five years forward how do you see this technology being used to the benefit of our society. Give me some examples.
MR. ANDREAS: 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 and their marriage was registered on the blockchain for the first time. They use the blockchain as a 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 could transfer the deed to a car. Even better and more importantly, if a car could look up its own title and render itself usable to the new owner automatically. And this concept is called Smart Property where the property recognizes its ownership through reference to the blockchain. All forms of decentralized registration can be implemented with a blockchain. 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 sharing economy similar to how we do Airbnb or sharing cars today. We can do many of those things using digital tokens. There is a company here in Toronto who developed an application that allows you upon submitting a transaction on the blockchain to unlock a door. For example, for an Airbnb apartment. So, your smartphone would make the payment and then also unlock the door to the apartment and have access to that property.
MR. MASSICOTTE: It's amazing. A secondary question. I don't understand by the blockchain for a couple getting married why? Is he scared to get mixed up with the wife or what's the issue? Why the need for that issue?
MR. ANDREAS: So. 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 they wanted to 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 and unalterable history that within an hour is completely unalterable by anyone and will be preserved through history because of the value of the transactions that occurs.
MR. MASSICOTTE: So the bedroom door does not open if it's the wrong person. Automatic accessing.
MR. GERSTEIN: Our concluding question from Senator Greene, please.
MR. GREENE: Thank you very much. I really, really 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 and we don't want to influence, I don't think, that pace of change or what it might lead to. So we have to write a report and the report will have recommendations. So 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, five years?
MR. ANDREAS: 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. And recognizing this is a private form of barter and transaction. Recognizing the corresponding principles which I consider neutral principles but there are principles of enlightenment which are freedom of association, freedom of expression, freedom of conscience. And so I think that removing ambiguity in that particular arena for personal use would be enormously useful.
MR. GREENE: I agree. Thank you very much.
MR. GERSTEIN: Mr. Antonopoulos, your reputation preceded you prior to your arrival. And you may recall that in my introductory remarks, I did not introduce you as a Bitcoin guru but as the Bitcoin guru.
MR. ANDREAS: You humbled me, Senator.
MR. GERSTEIN: 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 and we greatly appreciate your presentation today. Thank you very much. This meeting is concluded.