Usman: I'd like to call up the accounting and other issues panel which is really the final panel that we have for you today. This panel is going to be moderated by Ian Palm. He's a partner and a critical member of our Blockchain team here at Gowling WLG. On the panel as well is Paritosh Gambhir. He's a partner in the financial services and also the head of Blockchain at KMPG. We also have Ryan Leopold. He's a partner in the National Banking and Capital Markets Assurance Leader for PWC. And then we also have Mark Morency who is a Senior Vice President Financial Institutions Practice Leader for Arthur Gallagher Canada and will speak to insurance issues. We're just going to mic them up and while they're being mic'd I'm also going to hand to Ian Palm the microphone and you can start the panel with the microphone as well.
Ian: This morning we're going to explore some really interesting issues and Usman and Hilary started off with exploring some of the opportunities then our next panel looked at some of the use cases, which is great, and then we had some interesting discussion around the legal issues, which was fascinating. I deal with that on a regular basis and some of the advice that we're giving. But now we want to switch gears a little bit and focus on some other things. I want everyone to remember we're challenging accepted norms here we live with every day. Like this is how a business process works. But when we throw a distributed ledger technology into the mix, and Blockchain, we then challenge those business norms. We've got some people on our panel here, we've got some senior people at KPMG and at PWC and we've also got a representative from Gallagher. All very well established large organizations and I think they should be commended for diving into the Blockchain big time. We've got to my immediate right here we've got Ryan Leopold. Ryan's a partner at PWC and he is the National Banking and Capital Markets Leader of PWC. I'll let him get into detail on this thing but he's also got extensive experience in dealing with various financial institution sectors but he's also responsible for exploring the impact on cryptocurrency for PWC across a number of jurisdictions and is leading their global cryptocurrency accounting working group. I think its representing 30 odd countries that are part of your group.
Ryan: We're up to 34 now.
Ian: Wow. 34. We'll try to get you to cover maybe 32 of them?
Ryan: Don't ask me the name of them all.
Ian: Okay. All right. To his immediate right is Mark Morency and Mark is the Senior Vice President Financial Institutions at Gallagher. Mark's got extensive experience working in the financial services sector and only recently has joined the insurance community. He can provide perspective on both sides of the equation. To his immediate right is Paritosh Gambhir. Paritosh is a partner in Financial Services and head of Blockchain for KPMG. He's deep into this community. We've got some interesting perspectives to bring to the table and the one thing I like about working in this space, in particular, is that it's a very collaborative space. While I'm actively involved in the legal side I can engage with people that have accounting experience and financial services experience and insurance experience. Because these are issues which we have grappled with across the board. I would encourage people to raise their hand throughout. I've got some questions here and we've gone over some of the stuff but please speak out and raise your points as well.
First up I'm going to ask, and maybe I'll start with Ryan here, and we can get some input from others as well, what drew you to Blockchain technology? Have you been interested in cutting age technologies and developments for a long time? How did you get involved in advising on Blockchain in your organization?
Ryan: Having Paris Hilton selling ICO's
Ian: Can people hear? I'm going to pass the microphone down.
Ryan: Hello? This is isn't working. Is that better? I was trying to make a joke about Paris Hilton selling ICO's but I guess it wasn't just the mic that didn't go over too well. Wake up the audience. I've always been a tech junkie and always been fascinated with the latest technology and spent some spare time looking into this. Really intersected with my day job a little over 2 and a half years ago where we saw significant uptick in phone calls and inquiries with players who were entering the space. They were asking about what we could do from an audit, a controls, attacks perspective. Quite frankly, at that time, we didn't have a good solution. We entered into discussions with one particular client who was trying to put together an ICO, which was token funder, and they challenged us quite directly to say, "Why can't we audit this stuff?" At that point we really moved forward quite aggressively to look at developing a global solution there. Were obviously not there quite yet but really opened our eyes to the issues that were being faced by the market and the role that we, as a professional services firm, to play in that space.
Mark: I guess, the same as Ryan, I've always been interested in emerging technologies and as Ian mentioned I've only recently become an insurance broker which is maybe, an insurance broker of course is an intermediary, so why go to an intermediary in a world that's disintermediarating everything that we do? My previous employer, I won't mention who they are but it was one of the largest banks in Canada, they were very innovative and very big on emerging technologies. In fact they presented two of your panelists today. We won't mention who it is though. I was fortunate to have a 25 year career in banking. My most recent role was as the head of corporate insurance for that bank. As such I was the first major bank in Canada to purchase cyber insurance policy. In having done that I immediately got a phone call from 4 other banks saying, "What have you done? My board of directors is asking me why we don't have a cyber-insurance policy." Through that experience I realized that maybe I'd rather have more than one customer. That answers more of why I became an insurance broker as to more than why I came into these technologies. But as we'll talk about, and as you'll hear as we go through questions and answers, the insurance industry is not necessarily the quickest and most innovative industry all the time. The whole ecosystem around Blockchain, and I would say emerging technologies in general, needs insurance solutions. So really, as part of my new role, that's what we're doing for our customers is helping the insurance industry come to speed with this industry.
Paritosh: So just like the gentleman on the panel over here, I'm a bit of tech junkie myself. Although if I really went back to the first time I heard about Bitcoin, which was probably around 4 or 5 years ago, I thought it was not going to survive. But that's just my hunch then which I got proved wrong. As part of my role, obviously being in the financial services space, a lot of our clients just like Ryan was mentioning, started to ask about this. I was kind of a bit of the unique one over here because I actually got to learn about distributed technologies before I got to learn about Bitcoin. A client came and said, "Hey, how's this going to impact me going forward? We've been hearing a lot of stuff going on." We sat down with them. I went through it. We had some of our tech experts on deck and eventually I was like, "This is actually pretty revolutionary. I never knew this could actually possibly happen and how it's going to change the world, completely." We talk about it now and everyone keeps thinking about it being a hype but I'm going to say the next 2, 3 years, or 5 years, you'll actually see more of this come out. Then I followed along to another client coming in saying, "I want to invest into Bitcoin." And I was like, "Oh. I heard about that. Let me dive into it." Then we got into the whole wallets, mining and all the crazy stuff that goes on with Bitcoin. The world of cryptocurrencies is never going to go away. It's always going to stay here. I think it's exciting times for all of us, I can imagine on the panel, especially for Mark over here, at some point, but that's how I got into Blockchain and Bitcoin.
Ian: That's great. Okay, so we're going to pass the mic around so everyone can hear. Paritosh, I'm going to stay with you. We've obviously seen lots of use cases for cryptocurrency. We've some sort of growth and activity in application of tokenized systems. But as an accountant, and as an advisor on accounting issues, can you sort of delve into that a little bit and give us, address, some of the challenges that you need to deal with, you know, your accounting for transactions or your accounting for practices within a business, and you layer on a Blockchain or you take part of that away and you put some part of those transactions of the Blockchain, how are you then applying those accounting rules that you have in existence and maybe unpack it a little bit for us.
Paritosh: The one thing, just to make it clear, is if you talk about Blockchain as an enterprise solution versus crypto, I'm going to focus my answer on crypto first because the Blockchain part of it is relatively a little bit more, I don't want to call it simple but it's simpler. If you start off with a cryptocurrency framework, today, I think the number one problem in today's industry in general, forgetting accounting standard boards, is people still don't understand what Blockchain is. Or understand how cryptocurrency works and that's part of the big demeanor, if you want to call it. Once people get to understand it, that's when you can actually start to see standards evolve, including once regulators dive in and say this is how you should regulate it. Now, when it comes to cryptocurrencies in accounting, and I'll let some of my panelists also dive in over here, is that there is no authoritative literature that actually deals with how to account for cryptocurrency. Just like any new technology or any new part that comes out on the market, anything that is sort of unique, everything requires judgment. For example, from a legal perspective for the lawyers in the room, if a new product comes out that's not dealt with in the current securities law, or any law, you have to use your judgment to see where it lands in. Similar to cryptocurrencies it doesn't meet the definition of financial asset. It doesn't meet the definition of cash. I don't want to bore you with the glory details of it but it will meet the definition of depending on what your business model use is for that cryptocurrency. When you're dealing with it from a finance perspective, or an accounting perspective, my advice would be to always make sure you're talking to your auditors. Make sure you're looking through the industry and seeing what happens. The ISD, which is the governing body that comes up with all the various standards, is aware of the fact that this is happening in the market. But, you know, just like any other body, they do take their time to come up with the standards. We're hoping, I don't know, Ryan, next year, 2 years maybe, something may come up from an accounting perspective. Maybe they'll tweak the existing rules or maybe they'll keep the rules as it is. Or maybe they'll come up with a separate draft of a paper. We haven't received any exposure drafts as yet but when we do we will comment on them. The second part of it is just from an audit perspective. I think if you ever get into the grapple of why are some firms not accepting audit cryptocurrencies, Ryan already mentioned this, I think you have to be ready to take on a certain type of client. First of all, I think you need to have the expertise to do so and maybe 2 years ago, I think a lot of the big 4 firms, or a lot of the other firms, I don't think had the expertise to take this on. We're all developing solutions now because cryptocurrencies are here to stay. They're not going anywhere and as we go along we have to hire experts who will help us get through this process. I think the hesitation still comes to say, "We want this to be more regulated. To be able to actually serve that from a reputational perspective." But I think there are solutions that other firms are coming up. I feel like I'm hogging the mic now so I'm going to pass it to Ryan.
Ian: I'm just going to pass it down. I'm just the buffer between the accountants.
Ryan: Good job. Did you want to tell a joke? No joke?
Ian: No.
Ryan: Do you know why people that like Bitcoin don't like Ferraris?
Ian: Why?
Ryan: Because it's owned by Fiat. All right. Little Bitcoin humor. As Paritosh was mentioning that the accounting standards board really hasn't delved into, there was a discussion in September with their interpretations committee. They were talking about some of the issues. No clear direction yet as to development of standards. It's a tricky issue because it's tough to know where to really start because this particular topic, and again focusing on the crypto side for a minute, doesn't really touch just one standard out there from an accounting perspective. It impacts financial instruments, revenue, debt, it's really cross the board intangibles. What we've done as part of our group, and Ian mentioned that we've put together this working group that we have 34 countries on, we're trying to develop a single point of view across the globe. It doesn't make sense to have a Canadian view of what this stuff is and then have a firm from Hong Kong say, "No. We disagree." So, we need to have a single point of view for this global product. When we delved into the first thing that we looked at is what exactly are we talking about when we're talking about crypto. Everybody normally gravitates towards Bitcoin and that's really the currency side of it. But when you delve into it there are utility tokens, there's asset back tokens and then there's security tokens as well. We look at 4 different type of classes of coins or tokens. Each one has their own specific accounting treatment. You just really can't look at the topic of crypto and have the same accounting treatment across the board. With that we then delved into a number of the different use cases. We have exchanges, we have ICO's, we have miners, we have funds that are starting to hold this as an investment and, again, each one has their own specific issues that they are dealing with. Maybe I'll touch on two particular topics. One from the ICO or the ITO token perspective. The topic of revenue recognition has been front and center there. A lot of times when you have a token holder in many ways they're looking at it that they're trying to make a quick buck here, right? That they're buying it, the future potential is massive, and they want to try to double or triple their earnings very quickly. But when you dig into the actual contract that they've entered into there's some pretty specific terms there and other reasons why this token exists. It might give them access to a platform. It might give them service rights. That layer of information is really where you have to dig into. Because that's the agreement that they've entered into. When you look at it from a revenue recognition perspective, one of the things that we ask ourselves is who's party to this contract and who is the customer? You think about this and a lot of it is anonymous and you don't know who's on the other side. Trying to get into that level of detail is critical to determining if you record revenue, when you record revenue and how much you record. This also intersects very closely from a tax perspective. We had one client who has adamant that they did an ICO, they raised X dollars, that that was revenue. It was in their pocket. They didn't have to give it back if the platform didn't succeed. It was revenue. Okay, if you go down that path where we don't necessarily agree it should be revenue, we think it should be deferred over the life of the platform that you're developing, you now have a tax problem. Because you then have to recognize all that up front and pay taxes on it. The conversation obviously shifted quite quickly and they all bought into this deferral concept. But the intersection of all of this is very important to look at. With respect to off-balance sheet accounting, when you look at some of these exchanges, they hold crypto assets within the exchange. If they're going to produce a set of financial statements how do they record the tokens or the coins that they are holding? Whose asset is this really? Is it the exchange's asset or is it the customer's asset? Then you have to dig into are the assets actually segregated? Are they in their own wallet where that exchange can't touch it without the authorization of the individual investor? We dig into some of these exchanges. Some of them don't have the assets segregated. Some of them obviously have hot wallets and cold wallets and they do segregation but there are some that there's one pool of assets. If you ask who actually owns it it's the exchange that actually owns it. From a legal perspective. Then you have to divvy up the ownership rights from a customer perspective. This ties really closely into the fact that we don't have a single legal framework for these exchanges. At least a legal framework that makes sense for what they are doing. Many look at it as saying well they're actually a broker dealer. But the legal securities framework hasn't recognized them as that. They recognize them more as a money service business. So there are some things that you have to dig into to determine whether or not these things are on an off-balance sheet. There is no single answer for the industry right now. But looking at ownership rights, segregation and ultimately coming down to the question, if this thing went bankrupt and the exchange shut down, do you actually have ownership rights as a customer? Or are you saying goodbye to those assets as part of the bankruptcy proceedings?
Ian: Fascinating. I'm learning lots here. What you're describing there is sort of consistent with some of the experiences we've had. We've got entrepreneurs or groups of people who have seen great promise here and just have driven really fast and been quite successful. Then when you unpack the legal issues, or the accounting issues, you realize well they've done things or they may have done things which they may not have intended. It can result in some challenges. That leads us into the next thing I wanted to address here. Mark, this is for you. With all this hype and all this excitement around Blockchain and with all these opportunities we've also seen lots of volatility in prices of Bitcoin and Ethereum and so on and some high profile losses and some investigations. But we've got businesses that are growing. We've got joint ventures with financial institutions and big organizations that are spending a lot of money on this. Obviously they want insurance. So, how do you put insurance in place in these challenging times? And what are you advising people as a broker in this situation? Shall I give you the mic?
Mark: So, from an insurance perspective I think a lot of these same accounting and legal issues that you've heard about, both from our panel and the previous panel, have an impact on your ability to insure it. If you can't prove legal ownership, if you don't know who actually owns it or who is holding it, because Bitcoin, no one actually holds the Bitcoins, right? You hold a key that gives you access to your Bitcoins but you're not actually holding them, how do you insure something? You have to have an insurable interest in something. For example, I might have a real interest in my neighbours house not burning down. But I can't insure my neighbours house. I can only insure my own house. This is one of the issues that there is with insurance. Until you resolve some of these accounting and legal issues that causes problems for the insurers. In general though, as far as insuring companies, maybe splitting it into two types of companies, you have the larger companies let's say doing a Blockchain project. At RBC they're very involved with many Blockchain projects. They have to be careful about some of the things like ownership of data, ownership of what's the technology that's in there. Blockchain by its nature is a distributed ledger. What happens if you have a cyber-breach? Is that actually going to be tracked insurance under your cyber insurance policy given that you didn't actually hold that data? Again, it's those same problems. On the other side of it where we're having a lot of clients come in and we're helping a lot of clients that are working around the infrastructure of Blockchain or cryptocurrencies. I'll often talk about both and I realize that the two are separate. I think cryptocurrency makes a good example for a lot of the accounting and insurance issues because it's the sort of largest use case that's out there yet. I don't know how many people here are in a company that really Blockchain is your business. Now, if Blockchain is incidental to your business, probably not a problem for insurance. If Blockchain is your business insurers are very concerned about this technology. They don't necessarily understand it. The underwriters are learning it as we learn the issues that come along. The first thing when customers come to me for insurance, the first thing I advise them is one, it's going to take a long time. It does take longer to buy insurance for a Blockchain company than it does for other types of startups. Really what our job as insurance broker is to sit with you and walk the insurer through what it is you're doing. Having a good sense of what you're doing is important. There's almost this dichotomy between marketing your company versus insuring your company. A lot of my customers they'll be outsourcing Blockchain technology. Their website will talk about everything from ICO's to wallets to everything that's out there basically. But in reality when you delve into what they're doing they may actually have a very small piece of programing that they're doing. It should be just a technology company as easy to insure as any other type of technology. Being careful about being realistic about what it is that you're doing helps us to find the insurance you need. The insurance is out there. I would say that it's a much tougher marketing of your company to get us there with the insurer and really have the insurer understanding what you're doing.
Paritosh: Do you mind if I ask a question?
Mark: Yeah.
Paritosh: A majority of my clients that come to me and say, "We're going to get insurance", and the usual reference to the Lloyd syndicate giving some form of assurance, is that insurance generally, and I'm not talking about end of Blockchain but more around Bitcoin or any cryptocurrencies, does that generally tend to be expensive? Because that's the feedback that I'm getting.
Mark: Yes. Probably. It really depends on what the coin does. That's where I say that it takes a long time to secure the insurance. I would start thinking about the insurance until you need it. The more we can narrow down what it is that your exactly doing, the more we can narrow down is why you're buying the insurance in the first place. There's a lot of companies that are building applications or building a Fintec type of, maybe a tokenized payment system, something like that that the reason you need insurance is because you're not going to sell it to a bank without the bank contract requiring you to have insurance. We can really work with you to make sure that that insurance is both covering enough of what you need insured, you do want your insurance to be triggered when you need it, at the same time not being sort of just being broad brushed that it's going to be anything goes wrong with Blockchain the price goes down all of a sudden, or the price of Bitcoin goes down and all of sudden you're paying out an insurance claim. Working with us to work with your insurance company and really understand why you're buying the insurance is a good first step towards getting that price down.
Ian: Do you have anything you want to add?
Mark: Nope.
Ian: So, we've delved a little bit about risk and in dealing with insurance as a way to mitigate against risk. I think the three panelists here have had some material experience in dealing with business processes. We've been throwing around terms this morning like cyber security and AML compliance and privacy breaches and so forth. I wonder if I can get perspective from all three of you on what do you think the most challenging risks are from an implementation of a Blockchain system and how you mitigate against them in addition to insurance? Ryan, maybe I'll start with you.
Ryan: Okay. As Mark mentioned that there's a number of risks within here and that comes into play when you issue insurance. The things that we look at from our perspective are some of the major challenges that the industry is facing. Again, splitting between Blockchain and crypto, Blockchain is not as, by itself, is not as significant from a risk perspective. That obviously comes into play when you're looking at insurance. From a crypto perspective the things that we're looking at are AML. If funds moving across border, and that's a very significant challenge for the industry right now, the fact that there's a lot of anonymity in the market place. And that's one of the selling points early on was be anonymous and there were some players within the industry that were using crypto for illegitimate purposes. If you are now participating in that ecosystem where the coin that you have now purchased previously was used for criminal activity down the road, how do you mitigate that risk for yourself as an enterprise? Cyber-security obviously is another significant risk here. In many ways you look at humans, with respect to cyber-security, and humans are the weak link here, right? The technology itself is designed that it's "unhackable" and the Blockchains are secure but you start introducing humans into that picture and you all of sudden open up a number of other risks. Looking at some of the exchanges all it takes is for you to have your password unsecure. I think most exchanges are up to speed where there's multi signatures or two factor authentication and other controls that have been put into place. But all it takes is give out your password to the wrong person or forget about it. Some cyber-security implications right there.
Mark: I think for me one of the biggest most fascinating risks is also one of the strengths of the system is your private key. One of the panelists earlier today this morning mentioned about banking and sort of online banking passwords versus the private key. Once your private key is lost it is unrecoverable. That's just the end of it. I think more Bitcoins have probably been lost to people just mis-locating their key than any other cause. It's one thing to have a password security and I can always call up my bank and I forgot my password and re-identify who I am but that private key, if you have a tokenized system, is the absolute, to me, the riskiest thing that you can possibly have is something that once it's gone it's permanent. There's no way of recovering it. I also, kind of to divert a little bit, I also find it interesting we talk about Blockchain as being basically taking trust out of the system. And while it does take the need for trust with my counterparty out of the way, I still need to store that private key somewhere, if it's tokenized system. In fact, there's new trust relationships coming in and we have a lot of clients that are doing cold storage, for example. If I'm giving someone my private key to go into cold storage that's an awfully big trust relationship that I'm building with that counterparty. I would argue that actually trust hasn't been removed as a necessity in the system. It's just been relocated to somewhere else.
Paritosh: I agree with all our panelists have said. I think that one of the bigger misconceptions with Blockchain is that it's secure. It's secure because of the way things are recorded on the Blockchain. Not because it's not susceptible to hacks. Around Blockchain. Introducing humans or introducing exchanges or systems that are managed around it is where cyber-security becomes absolutely critical. AML obviously is, and I think we've already touched on that from a cyber-security perspective, there's different solutions that are being built out there today. There's KIC which is another customer getting somebody on board to come say, "Hey, come onto my exchange and come trade on Bitcoin or these other five securities I have." or utilities, whichever, it goes in hybrids, how do I monitor ongoing transactions with Bitcoin which is clearly quite a concern. If I shift my hat a little bit away from crypto and focus on enterprise, and I think the panel before did talk about this, because from a permissioned Blockchain environment privacy is probably top 3 factors that people need to be considering. What can you share on your Blockchain today? What can you not? It is customer data? Is it not customer data? Is it a trade secret? If I'm moving into a derivative syndicate that's doing to market am I using a curve that I'll be giving away proprietary information from? There's various things that you would have to consider. We're finding a lot more from a privacy perspective. We're getting our privacy experts involved. Especially with GDPR coming along the way and the P2P and all the local regulations as they apply. I would definitely put, from a crypto perspective I think the risks are pretty clear. From an enterprise perspective there are things that you still need to take into consideration. While Blockchain solves a lot of problems you still have to face challenges like privacy and obviously getting lawyers involved to make sure your smart contracts have developed, depending on how you structured them.
Ryan: Maybe I'll just mention one last thing. The other thing that we are grappling is regulatory risk. You think that you should have regulators there to protect your interest and you do but if you're running a business you also don't know where the regulators will land tomorrow. We've had a number of organizations approach us who had their operations in Asia and they were shut down and now they're looking to set up shop in another jurisdiction. There's a lot of risk out there right now. Until we get a stable regulatory framework there's risks really across the board there.
Ian: That's helpful. I want to get to the international aspects of things but I want to touch on a couple of other points first. By the way, if you've got a question please raise your hand because we've got some smart people here and I'm sure they'd like to get some perspective from people. I've got one question then maybe we'll go to the audience. There's been a lot of focus on cryptocurrencies and so on but when Hilary started this morning she went through a lot of use cases in a bunch of the sectors and we're dealing with companies that are looking at Blockchain and energy and supply chain and trade finance and we heard about opportunities to get a better voting system and so on. Those are all businesses too, they all need insurance, they all need to deal with accounting and audit issues. Paritosh, why don't we start with you on this one. Are the challenges different for those companies in those situations? Are there accounting and audit challenges in those situations that you need to deal with that are more or easier to deal with?
Paritosh: Why don't I start off with, again, I'm a strong believer in the power of the technology as it stands today and how it could possible revolutionize the world. 3,4 years from now. Am I particularly concerned from a particular industry for example? I think every industry should be concerned, or players in that industry, should be concerned to a certain extent. If I'm going to be removed from the system then what should I be doing? At the same time you could look at it as an opportunity. For me, everyone should look at it as an opportunity. There's a concept of do you want to be the disrupter or do you want to be disrupted? How do you put yourself ahead of the curve, looking at that. If you think of people who are doing it today who have come up with public announcements, the Nasdaqs of the world, are there people who have claim, and I can't mention their names, who claim that they may be removed from the process. Either, (a), the reason why I can't move forward. Or I'm not going to be removed from the ecosystem is because I'm going to become the disrupter or I'm going to build my own Blockchain that will put you onto the system. So that you don't say, "Oh, I don't need a Nasdaq in this world." I'm not suggesting that you don't need Nasdaq. The second thing is obviously regulation. We've touched upon this. You can't just remove somebody from the system. If you ever think of the P2P trading securities economy, today, removing somebody like a CDS, or the custodians around it, these are well established beautiful businesses for the last 50, 60 years. I think going back to triggers, if there's something that I would be concerned about, number one, if you're doing an ICO and it's not in a regulative fashion, I would be definitely be concerned. Definitely get a lawyer involved. There's some very smart lawyers at this firm sitting right in front of me as well. If you're doing something that's from a pro peer enterprising accounting and audit perspective, there's not much sort of accounting issues dealing with enterprise Blockchain, depending on what you're using it for, including from an audit perspective they will be what we call today, if you're in a permission environment and you have five people, or let's just say the five banks, one person has to take responsibility for the launching. One person is going to be what we call the operator. How do we know the operators doing what their supposed to be doing today? You would get something, what they call the equivalent of a SOC 1 or an internal controls report, so today when you go to CIBC custodies or securities or RBC custodies or securities, how do you know they're doing what they're supposed to be doing? They issue what they call a 3416, or equivalent of a SOC 1 internal controls report, which tells you that these are the 20 controls that what we've had in place and we've got an independent auditor to come check to make sure that happens. Because apart from privacy there's other things of note management. Who do you want to be on the chain? Who do you not want to be on the chain? Should I add the sixth bank coming into the economy or should I add the seventh insurance company onto this chain? Who is this chain? Do I trust my vendor that's coming onto the chain?
Mark: I sort of forget what the original question is but I'll answer it anyway. I think it will be interesting to see how Blockchain performs as a great equalizer in this system. With that trust being shifted you don't need to do your payment system through a major bank anymore. If someone else builds a Blockchain based … and there's a lot of Fintec's out there building payment systems, well if I don't need to worry about trust I don't need to have been built by the largest bank anymore. Now at the same time on the other side of it, who's likely to build the better system? The bank that can spend a billion dollars on it or the Fintec who's building it in the garage? I'm not sure that the banks necessarily have to be afraid of the new Fintec's coming in but at the same time they do have to be aware, and they have to be spending the money, they have to be doing the Blockchain research. On the other side of it if you're one of those small companies trying to break in perhaps there's a little bit of let them spend the money to figure out the research and then use it later on. It's a world of being very aware of what your counterparties are doing. The other piece I want to bring to that though, and again it's sort of re-drumming something you could have heard 20 years ago but it really is just as relevant today, is the multi-national internationalization of it. I don't necessarily need my counterparties need to be in Canada anymore, if they're on the Blockchain, it really doesn't matter where they are. So what is happening in other parts of the world? And are we viewing it from a global point of view? The reason I say that, I want to give an example and revert back to cryptocurrency, I've traveled earlier this year quite a bit through Southeast Asia and a few weeks ago I was in South America. We look at Bitcoin and we look at oh my gosh Bitcoin is below four thousand dollars now. What has happened? We look at Bitcoin as an investment. The rest of the world looks at Bitcoin as just a payment system. This was part of some of the original slides that we saw at the beginning of the day. I forget what the number was from the slide, 1.2 billion people that are unbanked today, and cryptocurrencies allow them the opportunity to just do banking. This is where it really is a payment system. There's this plethora of minor currencies. A lot of these minor cryptocurrencies are regional cryptocurrencies and they really are used as the payment system in small patches of India. Or small patches of other places around the world. Our mindset, I think, has to revolve a little bit that this isn't an investment tool. It is something that people are using and maybe the price of Bitcoin will go down and it will only be two thousand. It will still be always be something that will exist. The price isn't going down because it's dying. The price is just going down because maybe we misjudged what it is. Maybe I'll make one more comment, by the way, on that volatility and we make such news about the volatility of Bitcoin. I started my career trading foreign exchange. At that time the Canadian dollar was about sixty cents US. Now if you remember a few years ago the Canadian dollar was a dollar twenty and now it's about 75 cents US. That seems to me like a pretty volatile currency too. I'm not sure that we are over playing this whole volatility of cryptocurrencies. Back when I was a foreign exchange trader one of the basic things that you knew was that anyone who speculates on foreign exchange is a fool because you can't see all the factors that are driving the price of a currency. So maybe one of those questions with Bitcoin is it a currency? Is it a security? Is it a utility? That hasn't really been answered yet.
Ryan: We definitely have a third world bias. Or first world bias. We don't actually put ourselves in the shoes of those others. And look at Venezuela right now. It's really an important tool there to allow them to transact, actually have some kind of store value. We're looking at volatility then their currency was devalued. If they're holding the ball there they basically have nothing left but if they were holding Bitcoin or another crypto asset they have some kind of store value left. This repeats itself really across the globe and in many other examples. Back to the original question, I think that was being asked, in Don Tapscott's book, Blockchain Revolution, there is a section in there on the audit profession and the impact that that will potentially have. It is obviously thought provoking and bit controversial but it does open your eyes where the PWC's and KPMG's of the world where 10, 15, 20 years down the road would there be a need for a third party firm to come in and audit a set of accounts or provide some kind of comfort or validation. Where you have a Blockchain that is transparent and immutable and it's all verifiable why do you need a third party to come in and verify that for you? Industries, really, across the board can be disrupted here and nobody knows exactly how the future will play out but I think it all makes us pause and open our eyes and see what the potential implications can be.
Ian: Thanks. I ask the audience here if we've got any questions for our colleagues here? Sir?
Audience: Yes. Taking a look in your crystal ball 10 years hence what do you think the future is for the Canadian chartered banks, if we can do things in third world countries with simply a smart phone, can't we do it here and do away with all the banks?
Ian: Did everyone hear that question? What will the future of the Canadian banks be in 10 years if we can do all this stuff on Blockchain? Anyone want to take that one first?
Mark: I'll start with that.
Ian: Mark.
Mark: There are 5,000 banks in the US. There's 5 major banks but actually about 26 Schedule 1 banks in Canada and who knows how many tens of thousands of banks around the world. There's definitely going to be less banks 10 years from now. I do think the Canadian banks will be some of them. They will survive. I don't think they'll look like they do today. Now, as a Blockchain practitioner I won't sit here smugly though and say, "Oh. Look what's going to happen to the banks." I think we actually have to look at what's going to happen 10 year down the road too. 2 weeks ago I was in Virginia at Virginia Tech. At Virginia Tech they are building a quantum computing center and when quantum computing, they're spending a lot of money on this so they must think they're actually going to get it right, so let's say 3 to 5 years from now quantum computing comes online. A lot of those public Blockchains actually become suddenly irrelevant because a quantum computer can instantaneously rewrite the whole chain. Blockchain is absolutely immutable and absolutely secure until it's not. And quantum computing will mean that it's not. No matter what, this is probably what attracts me to emerging technologies because as soon as a technology emerges another one emerges that makes it irrelevant. I'm not saying that Blockchain will be irrelevant but I'm saying what it looks like today it probably won't look like 10 years from now.
Audience: That's a very thought provoking point.
Paritosh: I think that at one point on quantum computing it could be solve the problem for … on a Blockchain. But it all depends how you're using the quantum computing. It's a really good question, Sir. Where do I see the banks 10 years from now? Mark said it right. You don't know. There's going to be a lot of consolidation. It also depends on, I think, what would drive more of it is how fast regulation moves, faster. For example, I think, for most people in the banking industry today, like if you had no payments, Payment Canada is going through a whole revamp of their systems today. I think they may have, or may not have, piloted DLT. I think they came up with a report on Project Jasper recently about how they're planning to use DLT. I think one of the challenges was is that if you take payment, and put that on a Blockchain, you can't do it minus the securities, or mutual finance that is in the industry today. Because payments and investments go hand in hand. I think their next phase was to look at how they can revitalize that and agree to it together. I know TMX and CDS are working on something with them to see how they could leverage DLT technologies from payments and investments perspective. Now, if you think of that going forward and the regulators approving that, the faster that goes, you will see a lot more changes coming through. What I think you'll see in the next 5 years is a lot of other players being cut out. Some of the pilots the banks have done right now, from a Blockchain perspective, the intention could be to speed up things or make it more efficient but you'll find, globally, trade finance will change quite significantly. Because you now you actually know who your counterparty is. It's the solving of trust problem. I don't want to order something from you in the middle of, you could be in Asia, Africa or South America or in the US, because I don't know who you are. While I'm not going to make something for you until I know who you are. If I have a chain that actually discloses the information and I had a bank that actually deals with that on the chain that it will totally change the way trade finance works today. Along with supply chain.
Mark: I'll just add, maybe part of my optimism why I think the Canadian banks will still be there and why the Canadian system will be a leader, on November 15 the Bank of Canada, the Bank of England and the Singapore monetary authority put out a paper on Blockchain, Blockchain and the payment system. So I'm very optimistic that if our regulators stay up to speed and if you have people like the Bank of Canada putting out these kind of papers, we could really be a leader in this field.
Ryan: I just have to be careful what I say because banks are very important to our business right now. But if you look at one aspect of the banks business, which is the lending side, definitely we'll have disruption on the payment side but will that look different 10 years from now. But you look at the bank's core business which is lending and interest margin. There always will be a need for capital in the world. Obviously we see different ways with ICO's and how capital is being raised but that role, I think, will definitely be there in 10 years' time.
Ian: Thanks for the thought provoking question there. It's a good one. Do we have another question from the audience? All right. I think we have time for one more question. Sorry?
Audience: Sorry to be so
Ian: Oh. Follow up. Here we go.
Audience: It could be very disruptive. We've danced around the topic of CRA, Canadian Revenue Agency. Have they really clarified their position with regard to cryptocurrencies?
Ian: The question was has CRA clarified their views in regards to cryptocurrency? Unfortunately I don't have my tax partner on the panel here with me but she would be able to tell you. Do you gentleman want to take the tax question? Viewpoints on what cryptocurrency treatment would be?
Unknown: I have no … answer to that question.
Ian: Okay. I think that has been advanced and we can take that after the … On a day when you hear GM cutting 10,000 jobs including a whole bunch of jobs in Oshawa, which is unfortunate, and we spent a lot of time talking about disruption but we also had a lot of talk about opportunities as well. Which is great. I want to get some views from reach of the panelists, before we go here, you're actively involved in a bunch of jurisdictions. Mark, it seems like you travel the globe, which is pretty cool. And, Ryan, you're working with 34 different countries on some audit standards. And, Paritosh, you're a man of the world too. As Canadians, we've tipped the fact that we've got Blockchain innovators, and we've got some of them in the room here, we've got AI is a big thing. We've got two centers of quantum computing, one at Waterloo, one at UBC and I think there's another one at U of T, so we're tackling these interesting issues but from your perspective what can Canadians do, from the perspective of entrepreneurs, people that are banking from financial perspective, regulators, what can we do better today so that in 10 years from now we're not talking about the demise of big banks in Canada? We're hearing about the demise of lots of jobs at GM.
Ryan: Canada really has a very important role to play in this. I think we're often a little bit too shy to be seen as a leader in the global market place. We always think that it has to be done better somewhere else in the globe. But you look at the talent that we have in the Canadian landscape right now and it's every other day there's another press release about a technology company opening up shop here or expanding the number of jobs that they have. There really is a ton of potential and a ton of talent that we have in the Canadian market. We need to really leverage that talent and make sure that they do have the tools available to succeed. That links in with the regulatory landscape. The sandbox that the OSC has and out West. Let's give those companies the tools that they need to actually grow their business and become a global player. Let's get those regulations solved and make sure that there is complete clarity as to what they can do and what they can't do and allow them to focus on the business that they have and actually grow their companies.
Mark: I would reiterate the same thing. Now, I'm not necessarily an expert on where in the world technologies are coming from but just from my work experience, and as far as where requests coming, certainly a great portion of that innovation is coming from Canada. In fact, as far as requests for insurance, probably the only other countries, where we're seeing just as much as, maybe Switzerland and Singapore. I think that Canada should focus on emerging technologies as whole. I wouldn't put all of our eggs into Blockchain basket but we have some of the leading professors on things like artificial intelligence and many other inter-related technologies. I think over time you will find that artificial intelligence Blockchain could be very helpful to the people who are researching that type of field. But I'm very optimistic of where we are right now. I've never seen such, and really coast to coast, such a large participating in an industry that is emerging in the world.
Paritosh: I think your question broadens to not just Blockchain but innovation in general. I'll tackle that really quickly in terms of every company, or every organization, every individual in this room, every lawyer, every accountant, doesn't matter, your jobs I'm not saying are at risk, but you have to continue to think differently and do differently every single day otherwise you will become extinct. You have to think in a way that's saying, "My company's leading down this path." I quote the CEO of Time Warner from 2009, 2010, where he was asked a question, "Do you think Netflix is a threat." and he said, "Is the Albanian Army going to take over the world?" or something of that sort. As inappropriate as that is, well look at where Time Warner is and where Netflix is. Netflix, last I checked, their market cap was around 80 to 90 billion dollars and Time Warner almost went bankrupt. So, taking that example and asking yourself as a company, or as an individual, or as lawyers and accountant, how am I going to think differently going forward? Part of why I changed, not changed, but focused my role on Blockchain is because we briefly spoke about the audit profession going 10 years from now, how do I focus my efforts, or change my thinking, to actually be able to still harness the audit profession while having a Blockchain. Now, if I touch specifically on Blockchain, I think we've touched on government. Now the role that government has to play in any sort of emerging technology space, including Blockchain itself, is kind of critical. Because the more the government invests into something the more that technology's going to get harnessed and the more innovative we're going to get. Now while we're quite progressive over here, I'd say progressive in North America when it comes to Blockchain Technology, I think we're not as close to being where Asia is today. For example, in Singapore, you would be actually practically subsidized or funded to do a Blockchain project in Singapore by the government. Depending on what that it is. If you see some of the stuff that's coming out in Asia generally it's a lot faster than where we are today. I'm not saying the Canadian government should push faster. We're pretty progressive as it is. But from a North American standpoint we are definitely ahead of some of our peers over here. The other thing I will say is that the talent that we have, from a Blockchain perspective in Canada, is absolutely pretty immaculate. But what we see most of it doing is going outside the country than inside. That's one more thing I think we'd have to tackle over here and maybe that's government or community getting together and saying, "How do we retain the work that you're doing and use it here for the Canadian market?" There is research. That's been done. To say that Toronto, Waterloo or Kitchener region will be the next Silicon Valley but I think we're still far off from there. I know John Tory has been trying to convince some of the Canadians to come back. But I think our policies in general, the government being progressive, I think we can move faster but I think we're doing pretty well at the same time.
Ian: So thanks very much. I want to just thank your panel here for some very thoughtful, creative, in depth thinking and for some optimistic end to a discussion this morning. Thank you.
Usman: Okay. Thanks a lot Ian. Thank you all for coming. I'm hopeful that you all learnt a lot. I certainly did this morning and took in so much information. I want to leave you with two things. The first is that you may have heard from Patricia from that in fact our firm has been giving presentations to different institutions. So what we try to do is to see and learn a little bit about your business. We come in and we present to your group about the impact of Blockchain technology and some thoughts of legal issues that your own group should may be thinking about. So we're happy to do that. Feel free to reach out to myself or any of the professionals at Gowlings that you've met here today. The last is we have a lunch for all of you today. It's really an opportunity to meet each other. This is an area with very, very complicated issues and I can tell you that it's a very collegial bar, a very collegial group, and the best way to learn is to meet each other and learn from each other so we're happy to encourage that here today as well. Thank you once again. Thank you to all of our speakers and presenters and thank you again from coming.