Lexpert Magazine

LEXPERT MAGAZINE | SEPTEMBER 2016 63 BY GEORGE TAKACH TECHNOLOGY The invention enabling Bitcoin has profound implications for bankers, lawyers — the whole world, really Blockchain Reaction: Part I DIGITAL CURRENCIES, and the so- called "blockchain," are probably starting to show up on your "new business tech de- velopments" radar screen. Maybe what did it for you was the recent announcement by the Bank of Canada that it's testing some blockchain technology for its interbank payment space. You know you need to take something seriously when the Bank of Canada starts experimenting with it. ere 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 past few years.) Some are calling the development of blockchain as significant as the invention of printing — or even the internet itself. Regardless of the hype, digital currencies like Bitcoin and the blockchain technology that underpins them should indeed be gar- nering serious consideration by Canada's business community, as well as by govern- ments and range of other entities and orga- nizations that will be able to put these new functionalities to good use. And so, this month, a primer on what these new busi- ness models and technologies are; and next month, the legal issues they implicate. OFFICIAL VS. DIGITAL CURRENCIES 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 cur- rency is a medium of exchange, since it's accepted by merchants, other businesses and individuals. Indeed, the Canada Rev- enue Agency takes the view that tax obliga- tions can only be satisfied by "legal money," namely the Canadian dollar. Our official currency is also a "unit of ac- count," 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 econ- omy without an effective currency serving as a broadly accepted unit of account. Another role of an official currency is as a "store of value." is requires, ideally, that the currency have a stable value over time. Hyperinflation, as experienced by certain countries in Europe aer the Sec- ond World War, can negate this role of a currency, which then drives people to store gold, jewellery and other physical assets. It's useful to compare a digital currency on these three fronts (as a medium of ex- change; 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 dollar. FROM CASH TO PAYPAL In a modern economy like Canada's, there are a number of payment options. Of course, there's 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 "deli- cate" or "sensitive" item from the pharma- cy (or from the back rack of the magazine stand) paying by cash means you don't leave a trace of your purchase. And in 2013, cash still represented about 44 per cent of the volume, and 23 per cent of the value, of all point-of-sale transactions in Canada. Over the past 25 years, we have seen the steady growth of other payment systems, including debit cards and credit cards. More recently, certain financial institu- tions have backed gi cards for making mobile payments. You can also now make email transfers of payment. You can even deposit a cheque by photographing it. en there are the payment interme- diaries like PayPal, which stand between consumers and merchants. Growth in this business is staggering, as online shopping becomes an increasingly common experi- ence. In terms of worldwide e-commerce, some 15 per cent of all purchases are now processed through PayPal. In the developing world, some digital mi- cro-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 messages. 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, which sets the parameters of the money supply — the actual production of the bank notes and coins — and 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 Master- Card), the card issuing bank and a payment processor. e credit card company usually has a proprietary clearing system. In the case of debit cards, the credit card issuer is PHOTO: SHUTTERSTOCK | COLUMNS |

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