Jim Swanson, a technology practitioner at Burnet, Duckworth & Palmer LLP in Calgary, has what looks like a skinny chess pawn on his car keys. It's a fob. When he wants to fill up, all he has to do is pull in to an Esso station and pump the gas; the fob takes care of everything else. It's a conduit to his credit card, so he's charged for the gas. It collects his Air Mile points, his Esso Extra points and once Esso's computers run the fob account over to his bank, his credit-card points as well.
Welcome to the new frontiers of the cashless future. Honestly, unless you're a tech geek, you probably have no idea of what's about to hit. With the help of near-field communication technology, mobile-payment applications are revolutionizing daily commerce. One day soon, and probably a lot sooner than you might imagine, you won't need to carry a bulky wallet. You'll carry a digital wallet. Everything you need – including your credit cards, store cards, gift cards, points cards and transit pass – will be stored on your smart phone.
In the US, Google has partnered with MasterCard, Citigroup and Sprint Nextel to develop the Google Wallet. Verizon, AT&T and T-Mobile USA are working on a rival mobile-payments app called Isis. And similar alliances are being negotiated in Canada; most just haven't been made public, says Matthew Peters, national leader of markets and a technology practitioner at McCarthy Tétrault LLP in Vancouver. “Off the top of my head I can think of at least three public-sector clients that are involved in ventures like this,” Peters says. “But these tend to be private commercial deals that are typically not released.”
If you haven't been reading much about this, brace yourself. Your phone won't be just your digital wallet, it will be a coupon collector, automatically notifying stores or cafés when you're within 100 metres, so they can email you special offers. It will also be your shopping assistant, alerting a retailer when you walk through the door, so all you have to do is scan anything you want to buy. Your purchases will be paid and waiting for pickup when you're ready to leave. Oh, and you might very well use a virtual bank to pay.
Virtual currency, digital money and cyber banks are not wild futuristic concepts. They are here now thanks to advances in technology, says BDP's Swanson. “Even an older Blackberry today has more computing power than all the Apollo moon missions,” he says.
If that's a sobering thought, consider this: As the industrialized world stands on the threshold of a digital age, the technology is evolving much faster than the laws that regulate it. Canada's payment laws – aging statutes such as the Bills of Exchange Act the Canadian Payments Act – never contemplated the way Canadians are about to buy and pay for things. Privacy laws were not drafted with the notion that consumers would send personal information electronically through their telephones.
Far more than simple financial information is transmitted when you pay using your smart phone. “You've got customer analytics, geo-location information — where somebody is at any given point in time, their habits, what they look at and what they do with the information,” says Lisa Abe-Oldenburg, a partner with the IT law practice group at Bennett Jones LLP.
“The banks, payment companies and retailers that develop apps want to be able to track consumer transactions and activities. That gives rise to legal issues arising from privacy, consumer protection, security, liability, regulatory compliance – all kinds of things. This whole mobile commerce, mobile payments thing is a huge emerging industry,” says Abe-Oldenburg.
Does that make it a huge emerging practice areas for law firms? Abe-Oldenburg, for one, says yes. “It has to be. Everything is going on to hand-held mobile devices and everybody's doing it — it's not just the IT sector or the high-tech sector. Lawyers in almost all practice areas will be affected.
“I've been trying to educate my colleagues about how these issues can impact their clients because, as a practising lawyer in any firm, you're going to have a client at some point who is implementing some form of mobile technology, mobile payments, mobile analysis or customer analytics. It's coming in to everything. In terms of phenomena, this is the next Internet.”
In a clear indication of just how mainstream mobile-payment technology is becoming, Canadian Imperial Bank of Commerce and Rogers Communications Inc. did a deal last spring that allows the bank to essentially rent space on specially enabled SIM cards that go into Rogers phones. The card will allow the owner to pay for things using their CIBC Visa or MasterCard by simply tapping their smart phone on a special point-of-sale terminal at participating retailers.
The program is reportedly starting small, with the app limited to transactions under $50. But there is nothing small about what it stands for. It marks the start of real mobile payments in Canada.
Other Canadian banks and telecoms companies are reportedly in talks to partner up in similar arrangements because players today want to remain players tomorrow. Experts predict the universe for mobile payments will be US$617 billion by 2016. “What's going on right now is the beginning of the race to dominate this industry, and to some extent, it's a race between three parties,” says BDP's Swanson. “You've got the telecoms companies who want to get in on this. They want you to pay for things with your cellphone that go on your cell bill. You pay it at the end of the month and they make money on it.
“Then you have the traditional banks that want to make money off this too, but they don't have the infrastructure, so they need some kind of Internet or telecoms service provider to partner up with. Then there are all those third parties that are neither a telecoms company nor a bank, like PayPal,” says Swanson.
PayPal, by the way, is emerging as the 300-pound gorilla on the mobile-payments scene. With 113 million active accounts and revenue of US$2.7 billion in the first half of 2012, PayPal is not just getting its foot in the door — PayPal is in the building.
The banks cannot be happy. Every time a consumer pays by PayPal instead of a credit card, the bank loses the cut of the transaction it would have received from the merchant as card fees.
Remember talk of virtual banks? Swanson argues PayPal is one. “If you think about it, they let you deposit money. They let you use a different credit card to run through a PayPal transaction,” he says. “They're coming out with an e-wallet that allows you to not only buy anything you want, but to take it home for five to seven days to decide how you want to pay for it. So PayPal will pay the merchant and wait for you to tell them whether you want to use your credit card, debit card, or have them to finance it.
“It walks like a bank and quacks like a bank. It sounds like a bank to me.”
PayPal is also upping its game, moving from the Internet into bricks-and-mortar stores with mobile-payment apps that can be used at the likes of McDonald's and Home Depot. At the same time, a group of US retailers including Wal-Mart, Target and several grocery chains are teaming up to create Merchant Customer Exchange, their own mobile app.
Swanson says there are so many potential legal issues with the emerging mobile-payments model that it's difficult to know where to start. He uses the new Rogers-CIBC partnership as an example of the types of issues that can be triggered. “When you buy a phone on a plan, you don't have the right to suddenly switch over to another carrier,” he says. “And you may not have the right to install and use a non-Rogers digital wallet.”
Swanson points out that Verizon and Google are having a fight over this very issue in the US. “There's nothing to stop a service provider – whether Rogers or Bell or Verizon – from selling a proprietary imaged phone preventing you, as the end user, from disabling another party's applications from working on its systems,” he says. “Rogers, for example, might want you to use its application with CIBC.”
Does Swanson expect litigation in Canada over that? “Oh yeah. I expect there will be huge litigation.”
Matthew Peters from McCarthys calls the Google-Verizon dispute “a perfect example of the fights in this area. “This is essentially an ecosystem, and you're going to see a lot of jockeying about which ecosystem is going to come out on top. Look at the US. The carriers want to own this, but Google wants to be driving an ecosystem with the wallets it owns — and who's going to win? Well, the same story is going to play out to some extent in Canada.”
Charles Morgan, Quebec regional leader of the technology group practice at McCarthy Tétrault LLP, says if digital wallets are going to be embraced by Canadians, companies are going to have to adopt an open system that uses a common platform. “Consumers aren't going to want to have a digital wallet that only works with one financial institution, one merchant and one telephone company.”
Morgan believes the need for standardization will lead to “patent pools,” with telephone makers, telecoms companies, banks and data processors pooling patents and licensing them.
Think about it for moment. New players requiring legal advice. Existing clients negotiating software agreements and requiring privacy advice. A whole new set of emerging issues for banks, telecoms and phone manufacturers. IP pools, licensing agreements. Litigation.
It's all music to a law firm's ears. But more on that on a minute.
Even today, you can order your venti soya latté at Starbucks and hold out your smart phone for the barista to scan. One beep and you have paid. It is an everyday occurrence for many downtown lawyers and bankers who enjoy their toys.
The Starbucks smart-phone app has been a wild success. It's used by over 70 million people. But in a sign of how quickly the ground is changing, it is already yesterday's news. Starbucks is running a test program at 7,000 US locations using technology that allows customers to pay without having to actually take their phone out of their pocket or purse.
Eventually, when you walk into a Starbucks, your phone will notify the baristas and your name and photo will pop up on a screen behind the counter. You make your order, tell them your name, they match you to your photo and payment is complete.
So here's the question: You know what you're paying for and even how you'll be paying. But do you know what you're actually buying? Stephen Clark, for one, a banking lawyer at Osler, Hoskin & Harcourt LLP, believes the answer may be a small can of worms.
In Clark's view, the main legal issues around mobile-payment technologies have to do with consumer protections (a patchwork), disclosure obligations (unclear) and privacy (quite evident).
He says that, while mobile payment apps like the one offered by Starbucks can be faster and fun to use, many Canadians don't appreciate the risks involved. “If you give Starbucks $50 to put on a card and there are two million other people doing the same thing, have you ever stopped to consider how much money a Starbucks is holding?” he asks. (We'll save you the trouble, the answer is $100 million.)
“When we think of sums that large, we usually think of bank deposits that are CDIC insured,” says Clark, who sits on a committee of the Office of the Superintendent of Financial Institutions. “This is not. There are significant consumer-protection issues around people putting money somewhere that they can then use in electronic form.”
While no one would be pleased to lose $50 on a preloaded coffee card, they might feel more strongly about larger amounts loaded on to a prepaid credit card app. Such cards “run on the rails of Visa or MasterCard, but you don't necessarily need to be a bank or a financial institution to issue them — so again, the money you put into it is not CDIC insured.
Clark warns that making changes is not going to be simple. “The difficulty is that the law in relation to payment systems is caught up in a number of areas,” he says. “If it's in relation to banks, it's federal; it's provincial for everything else. So immediately you've got a push and pull between the federal government and the provinces about who's supposed to legislate in this area.”
In Canada, history suggests that is rarely a good place to be.
Ottawa is aware of the challenges it faces, and in 2010 the government struck the Task Force for the Payment Systems Review to look at the issues and make recommendations.
Its report last spring was a scathing indictment of Canada's lack of readiness for the new reality of mobile payments. The authors of Moving Canada into the Digital Age said bluntly Canada “is falling behind” in the international push to generate a secure mobile ecosystem and blamed the country's big banks, whose interests, they noted, lie in keeping potential new competitors out.
There were two recommendations most lawyers who work in the area feel were on the mark: The creation of a payments industry governing body, as well as a new public agency to scrutinize it.
Ottawa's response? It formed a wise-person's committee to meet regularly and discuss emerging payments-system issues with Finance.
Clark says he and many others were underwhelmed. “They didn't provide a roadmap, and I think a lot of people, to be honest, were very disappointed by that.”
Marc Lemieux, who leads the banking and financial-services practice group at Fraser Milner Casgrain LLP in Montreal, says that, with the new technology steaming down the track, Ottawa needs to take action. “Our system is based on technology that is over 100 years old and, for paper-based instruments, is very efficient,” says Lemieux. “But it has to be adapted to the new realities of the industry, which as we can all see are changing at a very rapid pace.”
There are some very big unanswered legal questions, he says. It is not entirely clear, for example, that the same consumer protections and disclosure obligations that apply to plastic cards extend to radio waves. “Do the laws we have apply to mobile payments? Uncertain. The laws talk about payment ‘cards,' they don't talk about payment applications on mobile phones. And these new technologies always come with a price. So who's going to pay for what, and how are the fees going to be disclosed?”
Many Canadians also fear that using mobile-payment technology can leave their financial information vulnerable. That is actually one thing people don't need to worry about, says Abe-Oldenburg of Bennett Jones, who has represented Enstream LP — a collaboration of Bell, Telus and Rogers that has been working on developing a secure credentials-management system for Canada.
“I know people are worried about using their cell phones for transactions. They think it's less secure for some reason,” Abe-Oldenburg says. “But, in fact, it's been proven the technology is much more secure than using a plastic credit card. There's nothing that's actually stored on your phone other the credentials to be able to identify who you are. The actual funds are not residing in your phone; they are still in a bank account somewhere.
“The technology being used to identify you and process the transaction at the point-of-sale is extremely secure and can only happen once. Nobody can cut into it, or intercept it. That's technologically impossible. It doesn't work.”
There are, however, a couple of things that such a high level of security would work for, according to Jim Swanson at Burnet, Duckworth & Palmer in Calgary. Those would be money laundering and tax evasion.
The combination of virtual banks, cyber-currency and high security is a recipe for anyone looking to avoid the tax man or launder the proceeds of crime, says Swanson, who adds that most Canadians, whether they're aware of it or not, have been using digital money for years. He points to things like Registered Retirement Savings Plans and Tax-Free Savings Accounts, which exist on paper. “It's not like anyone has a wheelbarrow full of your cash. They are digital funds, and digital funds can easily be made anonymous using encryption and anonymizing technologies.”
All anyone has to do to get things rolling is deposit funds with a cyber-cash company, he says. “It's like having a Cayman Islands account. All they'd know is your username and password and that you have some money on deposit with them. That's all they know. Then you could use that cyber currency.
“The transaction could be tracked but as to who did it, nobody would have any idea. There'd be an issuer, but it's probably not a bank. It's somebody that provides that service and it would be anonymous. Once the money's drawn, it can be spent without leaving traces.”
Swanson says there are already “a whole bunch of new service providers who are not really banks and may not be regulated — theoretically, they're subject to regulation but they're kind of flying under the radar. You've got to remember, a virtual bank is a lot cheaper to set up and run than one that actually has branches. So how are you going to catch a lot of those transactions?”
He believes it won't take long for Canadians to find and start using such companies. “I bet there'll be a demand for it. Not everyone wants the bank – or Revenue Canada – knowing exactly what they've spent down to the penny.”
Even if the deposit and subsequent transactions are on the straight and narrow, he says, it raises legal issues around jurisdiction. “Suppose you do a job for someone and they pay me in virtual cash through a cyber-cash company in Sweden. I know there are at least one or two there, and I can easily transfer funds from Canada to them in a couple of mouse clicks. Then I buy something from somebody in France and I want it delivered to my brother-in-law in London. Where's the connection with Canada? Who regulates the transaction? You have jurisdictional risk right away.
“Does a consumer sitting in Canada know who they're dealing with, where they are, and what legal system regulates that other party's activities? They probably have no idea.”
So, back to the task force recommendation for a federal regulator. Even if Canada did manage to get past a federal-provincial power struggle and put a single regulator in place, given the international scope of digital currency and cyber banks, is the thinking too small? “That's as big as we can think,” he says, “but is too small.
“The reason is, you don't have to deal with a company that's regulated by Canadian law at all. A key here is going to be international co-operation. There's going to have to be some.”
What does it all mean for Canada's corporate law firms looking to cultivate new practice lines? Does it mean more work? The answer seems to be yes, but in moderation right now. “It has become a bigger part of our practice,” says Dawn Jetten, a financial-services practitioner at Blake, Cassels & Graydon LLP, who adds that, while a traditional financial-institutions practice would have involved advising mainly banks, the firm is seeing non-traditional participants walk through the door.
Other firms are finding additional work coming from existing clients — banks, technology companies and the capital pools that invest in them, such as private-equity funds.
Torys LLP, for one, responded by pulling together 20 lawyers from other practice groups to form a payments and cards group last year. The impetus came from Blair Keefe, then chair of the firm's financial-institutions practice — and a member of the regulatory advisory group to the federal government's task force, says Les Viner, the firm's managing partner. “Blair came to me and said we need to be on top of this practice area, and we need to hire Ben Geva because he's an international payments expert, and we need to put together an interdisciplinary group. I said ‘good idea,' and he did it.”
Geva, a professor at Osgoode Hall Law School who specializes in payment and credit instruments, electronic banking and regulation of the payment system, has joined Torys as counsel. “We need to understand this intersection of finance and technology,” says Viner. “It's mobile-payment technology. It's retailers that give you coupons when you're near their store by using GPS technology. It's non-money money, like Facebook credits that are used to buy and sell stuff. It's all these things that were never contemplated by the Bills of Exchange Act when it was passed well over 100 year ago.
“So this encompasses bank regulatory, technology, outsourcing, privacy, competition, dispute resolution, M&A and anti-money laundering expertise.”
While Torys obviously sees potential, Viner is asked how much potential he sees in the changing landscape. He pauses for a moment. “What I would say is, it's leading-edge work. It's interesting and it's complex and engages all these different areas, and we love doing work that engages multiple disciplines. I don't know how much legal work there'll be but I know there will be very, very few firms able to do whatever there is.
“It's a niche area. If financial institutions are a large part of your practice, you have to know how all this works. So I think it will create new opportunities, but I don't see a tsunami of legal work coming down the pipeline.”
We are still in the early days, but give it two or three years.
Welcome to the new frontiers of the cashless future. Honestly, unless you're a tech geek, you probably have no idea of what's about to hit. With the help of near-field communication technology, mobile-payment applications are revolutionizing daily commerce. One day soon, and probably a lot sooner than you might imagine, you won't need to carry a bulky wallet. You'll carry a digital wallet. Everything you need – including your credit cards, store cards, gift cards, points cards and transit pass – will be stored on your smart phone.
In the US, Google has partnered with MasterCard, Citigroup and Sprint Nextel to develop the Google Wallet. Verizon, AT&T and T-Mobile USA are working on a rival mobile-payments app called Isis. And similar alliances are being negotiated in Canada; most just haven't been made public, says Matthew Peters, national leader of markets and a technology practitioner at McCarthy Tétrault LLP in Vancouver. “Off the top of my head I can think of at least three public-sector clients that are involved in ventures like this,” Peters says. “But these tend to be private commercial deals that are typically not released.”
If you haven't been reading much about this, brace yourself. Your phone won't be just your digital wallet, it will be a coupon collector, automatically notifying stores or cafés when you're within 100 metres, so they can email you special offers. It will also be your shopping assistant, alerting a retailer when you walk through the door, so all you have to do is scan anything you want to buy. Your purchases will be paid and waiting for pickup when you're ready to leave. Oh, and you might very well use a virtual bank to pay.
Virtual currency, digital money and cyber banks are not wild futuristic concepts. They are here now thanks to advances in technology, says BDP's Swanson. “Even an older Blackberry today has more computing power than all the Apollo moon missions,” he says.
If that's a sobering thought, consider this: As the industrialized world stands on the threshold of a digital age, the technology is evolving much faster than the laws that regulate it. Canada's payment laws – aging statutes such as the Bills of Exchange Act the Canadian Payments Act – never contemplated the way Canadians are about to buy and pay for things. Privacy laws were not drafted with the notion that consumers would send personal information electronically through their telephones.
Far more than simple financial information is transmitted when you pay using your smart phone. “You've got customer analytics, geo-location information — where somebody is at any given point in time, their habits, what they look at and what they do with the information,” says Lisa Abe-Oldenburg, a partner with the IT law practice group at Bennett Jones LLP.
“The banks, payment companies and retailers that develop apps want to be able to track consumer transactions and activities. That gives rise to legal issues arising from privacy, consumer protection, security, liability, regulatory compliance – all kinds of things. This whole mobile commerce, mobile payments thing is a huge emerging industry,” says Abe-Oldenburg.
Does that make it a huge emerging practice areas for law firms? Abe-Oldenburg, for one, says yes. “It has to be. Everything is going on to hand-held mobile devices and everybody's doing it — it's not just the IT sector or the high-tech sector. Lawyers in almost all practice areas will be affected.
“I've been trying to educate my colleagues about how these issues can impact their clients because, as a practising lawyer in any firm, you're going to have a client at some point who is implementing some form of mobile technology, mobile payments, mobile analysis or customer analytics. It's coming in to everything. In terms of phenomena, this is the next Internet.”
In a clear indication of just how mainstream mobile-payment technology is becoming, Canadian Imperial Bank of Commerce and Rogers Communications Inc. did a deal last spring that allows the bank to essentially rent space on specially enabled SIM cards that go into Rogers phones. The card will allow the owner to pay for things using their CIBC Visa or MasterCard by simply tapping their smart phone on a special point-of-sale terminal at participating retailers.
The program is reportedly starting small, with the app limited to transactions under $50. But there is nothing small about what it stands for. It marks the start of real mobile payments in Canada.
Other Canadian banks and telecoms companies are reportedly in talks to partner up in similar arrangements because players today want to remain players tomorrow. Experts predict the universe for mobile payments will be US$617 billion by 2016. “What's going on right now is the beginning of the race to dominate this industry, and to some extent, it's a race between three parties,” says BDP's Swanson. “You've got the telecoms companies who want to get in on this. They want you to pay for things with your cellphone that go on your cell bill. You pay it at the end of the month and they make money on it.
“Then you have the traditional banks that want to make money off this too, but they don't have the infrastructure, so they need some kind of Internet or telecoms service provider to partner up with. Then there are all those third parties that are neither a telecoms company nor a bank, like PayPal,” says Swanson.
PayPal, by the way, is emerging as the 300-pound gorilla on the mobile-payments scene. With 113 million active accounts and revenue of US$2.7 billion in the first half of 2012, PayPal is not just getting its foot in the door — PayPal is in the building.
The banks cannot be happy. Every time a consumer pays by PayPal instead of a credit card, the bank loses the cut of the transaction it would have received from the merchant as card fees.
Remember talk of virtual banks? Swanson argues PayPal is one. “If you think about it, they let you deposit money. They let you use a different credit card to run through a PayPal transaction,” he says. “They're coming out with an e-wallet that allows you to not only buy anything you want, but to take it home for five to seven days to decide how you want to pay for it. So PayPal will pay the merchant and wait for you to tell them whether you want to use your credit card, debit card, or have them to finance it.
“It walks like a bank and quacks like a bank. It sounds like a bank to me.”
PayPal is also upping its game, moving from the Internet into bricks-and-mortar stores with mobile-payment apps that can be used at the likes of McDonald's and Home Depot. At the same time, a group of US retailers including Wal-Mart, Target and several grocery chains are teaming up to create Merchant Customer Exchange, their own mobile app.
Swanson says there are so many potential legal issues with the emerging mobile-payments model that it's difficult to know where to start. He uses the new Rogers-CIBC partnership as an example of the types of issues that can be triggered. “When you buy a phone on a plan, you don't have the right to suddenly switch over to another carrier,” he says. “And you may not have the right to install and use a non-Rogers digital wallet.”
Swanson points out that Verizon and Google are having a fight over this very issue in the US. “There's nothing to stop a service provider – whether Rogers or Bell or Verizon – from selling a proprietary imaged phone preventing you, as the end user, from disabling another party's applications from working on its systems,” he says. “Rogers, for example, might want you to use its application with CIBC.”
Does Swanson expect litigation in Canada over that? “Oh yeah. I expect there will be huge litigation.”
Matthew Peters from McCarthys calls the Google-Verizon dispute “a perfect example of the fights in this area. “This is essentially an ecosystem, and you're going to see a lot of jockeying about which ecosystem is going to come out on top. Look at the US. The carriers want to own this, but Google wants to be driving an ecosystem with the wallets it owns — and who's going to win? Well, the same story is going to play out to some extent in Canada.”
Charles Morgan, Quebec regional leader of the technology group practice at McCarthy Tétrault LLP, says if digital wallets are going to be embraced by Canadians, companies are going to have to adopt an open system that uses a common platform. “Consumers aren't going to want to have a digital wallet that only works with one financial institution, one merchant and one telephone company.”
Morgan believes the need for standardization will lead to “patent pools,” with telephone makers, telecoms companies, banks and data processors pooling patents and licensing them.
Think about it for moment. New players requiring legal advice. Existing clients negotiating software agreements and requiring privacy advice. A whole new set of emerging issues for banks, telecoms and phone manufacturers. IP pools, licensing agreements. Litigation.
It's all music to a law firm's ears. But more on that on a minute.
Even today, you can order your venti soya latté at Starbucks and hold out your smart phone for the barista to scan. One beep and you have paid. It is an everyday occurrence for many downtown lawyers and bankers who enjoy their toys.
The Starbucks smart-phone app has been a wild success. It's used by over 70 million people. But in a sign of how quickly the ground is changing, it is already yesterday's news. Starbucks is running a test program at 7,000 US locations using technology that allows customers to pay without having to actually take their phone out of their pocket or purse.
Eventually, when you walk into a Starbucks, your phone will notify the baristas and your name and photo will pop up on a screen behind the counter. You make your order, tell them your name, they match you to your photo and payment is complete.
So here's the question: You know what you're paying for and even how you'll be paying. But do you know what you're actually buying? Stephen Clark, for one, a banking lawyer at Osler, Hoskin & Harcourt LLP, believes the answer may be a small can of worms.
In Clark's view, the main legal issues around mobile-payment technologies have to do with consumer protections (a patchwork), disclosure obligations (unclear) and privacy (quite evident).
He says that, while mobile payment apps like the one offered by Starbucks can be faster and fun to use, many Canadians don't appreciate the risks involved. “If you give Starbucks $50 to put on a card and there are two million other people doing the same thing, have you ever stopped to consider how much money a Starbucks is holding?” he asks. (We'll save you the trouble, the answer is $100 million.)
“When we think of sums that large, we usually think of bank deposits that are CDIC insured,” says Clark, who sits on a committee of the Office of the Superintendent of Financial Institutions. “This is not. There are significant consumer-protection issues around people putting money somewhere that they can then use in electronic form.”
While no one would be pleased to lose $50 on a preloaded coffee card, they might feel more strongly about larger amounts loaded on to a prepaid credit card app. Such cards “run on the rails of Visa or MasterCard, but you don't necessarily need to be a bank or a financial institution to issue them — so again, the money you put into it is not CDIC insured.
Clark warns that making changes is not going to be simple. “The difficulty is that the law in relation to payment systems is caught up in a number of areas,” he says. “If it's in relation to banks, it's federal; it's provincial for everything else. So immediately you've got a push and pull between the federal government and the provinces about who's supposed to legislate in this area.”
In Canada, history suggests that is rarely a good place to be.
Ottawa is aware of the challenges it faces, and in 2010 the government struck the Task Force for the Payment Systems Review to look at the issues and make recommendations.
Its report last spring was a scathing indictment of Canada's lack of readiness for the new reality of mobile payments. The authors of Moving Canada into the Digital Age said bluntly Canada “is falling behind” in the international push to generate a secure mobile ecosystem and blamed the country's big banks, whose interests, they noted, lie in keeping potential new competitors out.
There were two recommendations most lawyers who work in the area feel were on the mark: The creation of a payments industry governing body, as well as a new public agency to scrutinize it.
Ottawa's response? It formed a wise-person's committee to meet regularly and discuss emerging payments-system issues with Finance.
Clark says he and many others were underwhelmed. “They didn't provide a roadmap, and I think a lot of people, to be honest, were very disappointed by that.”
Marc Lemieux, who leads the banking and financial-services practice group at Fraser Milner Casgrain LLP in Montreal, says that, with the new technology steaming down the track, Ottawa needs to take action. “Our system is based on technology that is over 100 years old and, for paper-based instruments, is very efficient,” says Lemieux. “But it has to be adapted to the new realities of the industry, which as we can all see are changing at a very rapid pace.”
There are some very big unanswered legal questions, he says. It is not entirely clear, for example, that the same consumer protections and disclosure obligations that apply to plastic cards extend to radio waves. “Do the laws we have apply to mobile payments? Uncertain. The laws talk about payment ‘cards,' they don't talk about payment applications on mobile phones. And these new technologies always come with a price. So who's going to pay for what, and how are the fees going to be disclosed?”
Many Canadians also fear that using mobile-payment technology can leave their financial information vulnerable. That is actually one thing people don't need to worry about, says Abe-Oldenburg of Bennett Jones, who has represented Enstream LP — a collaboration of Bell, Telus and Rogers that has been working on developing a secure credentials-management system for Canada.
“I know people are worried about using their cell phones for transactions. They think it's less secure for some reason,” Abe-Oldenburg says. “But, in fact, it's been proven the technology is much more secure than using a plastic credit card. There's nothing that's actually stored on your phone other the credentials to be able to identify who you are. The actual funds are not residing in your phone; they are still in a bank account somewhere.
“The technology being used to identify you and process the transaction at the point-of-sale is extremely secure and can only happen once. Nobody can cut into it, or intercept it. That's technologically impossible. It doesn't work.”
There are, however, a couple of things that such a high level of security would work for, according to Jim Swanson at Burnet, Duckworth & Palmer in Calgary. Those would be money laundering and tax evasion.
The combination of virtual banks, cyber-currency and high security is a recipe for anyone looking to avoid the tax man or launder the proceeds of crime, says Swanson, who adds that most Canadians, whether they're aware of it or not, have been using digital money for years. He points to things like Registered Retirement Savings Plans and Tax-Free Savings Accounts, which exist on paper. “It's not like anyone has a wheelbarrow full of your cash. They are digital funds, and digital funds can easily be made anonymous using encryption and anonymizing technologies.”
All anyone has to do to get things rolling is deposit funds with a cyber-cash company, he says. “It's like having a Cayman Islands account. All they'd know is your username and password and that you have some money on deposit with them. That's all they know. Then you could use that cyber currency.
“The transaction could be tracked but as to who did it, nobody would have any idea. There'd be an issuer, but it's probably not a bank. It's somebody that provides that service and it would be anonymous. Once the money's drawn, it can be spent without leaving traces.”
Swanson says there are already “a whole bunch of new service providers who are not really banks and may not be regulated — theoretically, they're subject to regulation but they're kind of flying under the radar. You've got to remember, a virtual bank is a lot cheaper to set up and run than one that actually has branches. So how are you going to catch a lot of those transactions?”
He believes it won't take long for Canadians to find and start using such companies. “I bet there'll be a demand for it. Not everyone wants the bank – or Revenue Canada – knowing exactly what they've spent down to the penny.”
Even if the deposit and subsequent transactions are on the straight and narrow, he says, it raises legal issues around jurisdiction. “Suppose you do a job for someone and they pay me in virtual cash through a cyber-cash company in Sweden. I know there are at least one or two there, and I can easily transfer funds from Canada to them in a couple of mouse clicks. Then I buy something from somebody in France and I want it delivered to my brother-in-law in London. Where's the connection with Canada? Who regulates the transaction? You have jurisdictional risk right away.
“Does a consumer sitting in Canada know who they're dealing with, where they are, and what legal system regulates that other party's activities? They probably have no idea.”
So, back to the task force recommendation for a federal regulator. Even if Canada did manage to get past a federal-provincial power struggle and put a single regulator in place, given the international scope of digital currency and cyber banks, is the thinking too small? “That's as big as we can think,” he says, “but is too small.
“The reason is, you don't have to deal with a company that's regulated by Canadian law at all. A key here is going to be international co-operation. There's going to have to be some.”
What does it all mean for Canada's corporate law firms looking to cultivate new practice lines? Does it mean more work? The answer seems to be yes, but in moderation right now. “It has become a bigger part of our practice,” says Dawn Jetten, a financial-services practitioner at Blake, Cassels & Graydon LLP, who adds that, while a traditional financial-institutions practice would have involved advising mainly banks, the firm is seeing non-traditional participants walk through the door.
Other firms are finding additional work coming from existing clients — banks, technology companies and the capital pools that invest in them, such as private-equity funds.
Torys LLP, for one, responded by pulling together 20 lawyers from other practice groups to form a payments and cards group last year. The impetus came from Blair Keefe, then chair of the firm's financial-institutions practice — and a member of the regulatory advisory group to the federal government's task force, says Les Viner, the firm's managing partner. “Blair came to me and said we need to be on top of this practice area, and we need to hire Ben Geva because he's an international payments expert, and we need to put together an interdisciplinary group. I said ‘good idea,' and he did it.”
Geva, a professor at Osgoode Hall Law School who specializes in payment and credit instruments, electronic banking and regulation of the payment system, has joined Torys as counsel. “We need to understand this intersection of finance and technology,” says Viner. “It's mobile-payment technology. It's retailers that give you coupons when you're near their store by using GPS technology. It's non-money money, like Facebook credits that are used to buy and sell stuff. It's all these things that were never contemplated by the Bills of Exchange Act when it was passed well over 100 year ago.
“So this encompasses bank regulatory, technology, outsourcing, privacy, competition, dispute resolution, M&A and anti-money laundering expertise.”
While Torys obviously sees potential, Viner is asked how much potential he sees in the changing landscape. He pauses for a moment. “What I would say is, it's leading-edge work. It's interesting and it's complex and engages all these different areas, and we love doing work that engages multiple disciplines. I don't know how much legal work there'll be but I know there will be very, very few firms able to do whatever there is.
“It's a niche area. If financial institutions are a large part of your practice, you have to know how all this works. So I think it will create new opportunities, but I don't see a tsunami of legal work coming down the pipeline.”
We are still in the early days, but give it two or three years.
