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By George S. Takach
Digital “currencies”, and the so-called “blockchain”, are probably starting to show up on
your “new business tech developments” radar screen. Perhaps what did it for you was the
recent announcement by the Bank of Canada that it is participating in a test of some blockchain
technology in its inter bank payment space. You know you need to take something seriously
when the Bank of Canada starts experimenting with it.
There is a lot of interest around digital currencies and the blockchain (by some
estimates, around US$1 billion has been invested in blockchain-related start up companies in
the last few years). Some are calling the development of blockchain as significant as the
invention of printing – or even the internet. Regardless of the hype, digital currencies, such as
bitcoin, and the blockchain technology that underpins them, should indeed be garnering serious
consideration by Canada’s business community, as well as by governments and range of other
entities and organizations that will be able to put to good use these new functionalities. And so,
this month a primer on what these new business models and technologies are; and next month,
the legal issues that they implicate.
Official Money Versus Digital Currency
One way to understand digital currencies, is to contrast them with traditional currency and
payment systems. When we think of “money”, we usually have in mind the legal tender of a
country; in Canada’s case, the Canadian dollar.
Our nation’s official currency is a medium of exchange, as it’s accepted by merchants, other
businesses, and individuals. Indeed, the Canada Revenue Agency takes the view that tax
obligations can only be satisfied by “legal money”, namely the Canadian dollar.
Our official currency is also a “unit of account”, in that the prices of the multitude of goods and
services in the economy are denominated in Canadian dollars, so that the marketplace can
compare relative prices and value quickly and efficiently. It would be difficult to operate a
market-based economy without an effective currency serving as a broadly accepted unit of
Another role of an official currency is as a “store of value”. This requires, ideally, that the
currency have a stable value over time. Hyperinflation, as experienced by certain countries in
Europe after the second world war, can negate this role of a currency, which then drives people
to store gold, jewellery and other physical assets.
It is useful to compare a digital currency on these three fronts (as a medium of exchange; as a
“unit of account”; and as a “store of value”), but before doing that, let’s also consider the various
traditional payment systems that have evolved around official currency, including the Canadian
From Cash to PayPal
In a modern economy like Canada’s, there are a number of payment options. Of course there is
cash – payment by official government bank notes and coins. And cash has a lot going for it – it
is easy to use, it’s quite secure, and it gives you anonymity when you use it. When you buy that
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-2“delicate” or “sensitive” item from the pharmacy, or from the back rack of the magazine seller,
paying by cash means you don’t leave a trace of your purchase. And in 2013, cash still
represented about 44% of the volume, and 23% of the value, of all point-of-sale transactions in
In the last 25 years, we have seen the steady growth of other payment systems, including debit
cards and credit cards. More recently, certain financial institutions have backed gift cards for
making mobile payments. You can also now make email transfers of payment; you can even
deposit a cheque by photographing it.
Then there are the payment intermediaries like PayPal, who stand between consumers and
merchants. In terms of worldwide e-commerce, some 15% of all purchases are now processed
through PayPal.
In the developing world, some digital micro-payment systems have come to market, such as
M-PESA in Kenya (and a number of other countries), and Fundamo in South Africa (and 33
other countries). With these systems, money can be transferred using mobile phones and text
With all these forms of payment, there is a central authority that manages the payment system.
In the case of cash, that would be the federal government, that sets the parameters of the
money supply, the actual production of the bank notes and coins, sets interest rates (through
the Bank of Canada), and the like.
As for the other forms of payment noted above, credit card systems typically have a credit card
company (think Visa or Mastercard), the card issuing bank, and a payment processor. The
credit card company usually has a proprietary clearing system. In the case of debit cards, the
credit card issuer is replaced by the Interac Association, whose members settle their payment
flows via the Canadian Payments Association.
The essential point is, the credit and debit card systems have large institutions to manage and
record transactions, which institutions are subject to regulatory oversight by government
departments and agencies.
Peer to Peer (P2P) Digital Currencies
Digital currencies, like bitcoin, that are based on the blockchain P2P IT system, are structured
quite differently than the traditional payment systems. There is no central authority, or even a
managing intermediary. Rather, digital information (reflecting various transactions), fully
encrypted, is recorded and stored on a distributed electronic ledger. So, rather than your bank,
or payment processor, keeping track of all transactions, a multitude of participants in the digital
currency P2P network all have transparent access to all transactions effected over the system.
In the case of bitcoin, for example, roughly every 10 minutes, the then in flight transactions are
permanently settled by being encased in the blockchain ledger, after which they are not
Put another way, with the traditional payment methodology, trust is generated by the fact that
the system is overseen by large, (typically) solvent, and highly regulated banks and other
intermediaries who are keeping detailed records of all transactions. With blockchain, the
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-3distributed ledger system generates the trust, because all information is transparent and
replicated for all participants to see.
Beyond Payments
While payments (including foreign remittances; other e-fund transfers; facilitating frictionless
e-commerce; etc.) is the first widespread application for which blockchain is being pressed into
service, astute commentators are predicting that literally hundreds of other business processes
(as well as government and other public sector workflows), will come to take advantage of
blockchain systems over the coming years. Essentially, any activity today where an entity
records information about transactions, these pundits say can be done more cheaply and
efficiently through blockchain.
For instance, press reports have the Bank of England considering a cryptography-oriented
payments network, structured along the lines of bitcoin. The bank’s chief economist is quoted
as saying that digital currencies truly raise some fundamental questions about the very future of
As well, in terms of the public sector, activities such as recording and storing information about
births, deaths, marriages, divorces, and other key stages/events in life are good candidates for
blockchain treatment. And in the educational sector, information about diplomas actually
awarded; by keeping track of them on the blockchain, there is less opportunity for fraud, forgery
or misrepresentation.
Driving records also raise possibilities. For sure storing your license, but also your actual
driving behaviour, so that you (or your insurance company) can more readily translate your
safety record into reduced auto insurance premiums.
Land titles is another potential application, which also raises the prospect of “public-private
hybrid” models of blockchain deployment. For example, with respect to land titles, you may still
have a central registry, but it has perhaps mandated the use of its approved P2P networked
land titles registry system (which in turn incorporates a lot of the value-adds possible with
blockchain). And once you have land titles done this way, can the jurisdiction’s personal
property security registration system be far behind? And so on, including building a new type of
stock exchange on the foundation of a blockchain distributed ledger system.
In the private sector a range of blockchain applications are also being contemplated. “Smart
contracts” is one type of use, where the encoding of the blockchain releases specific payments
whenever certain use is made of a particular software, song, or some other intellectual property.
Another likely candidate is in the insurance space, where policies, premium payments, and
payouts can all be stored and managed through the blockchain.
Blockchain as the Jewell
There have been a number of incidents over the past few years which have tarnished the
reputation of Bitcoin. There have been irregularities with some of the players in the Bitcoin
space, and the value of a bitcoin relative to official currencies has sometimes gyrated wildly. It
is worth keeping in mind, however, that there are a number of other digital currencies being
pressed into service, and often they have adopted changes in their business models to address
some of the perceived deficiencies of the Bitcoin system.
DOCS 15714384v1
-4Moreover, a number of commentators who remain skeptics about bitcoin and other digital
currencies, nevertheless feel quite bullish about the prospects for blockchain technology. And
you have to remember it’s very early days both with digital currencies and blockchain. I also
predict we will see a plethora of variations on the blockchain come to market, again with each
successive one correcting a flaw in the earlier system. Accordingly, given their inevitable future
growth and usage, it is important to understand the legal implications of both, to which we turn
next month.
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