Cryptocurrency and the soul of money

Initially viewed with curiosity and amusement, crypto-currencies are becoming less and less laughable and more and more frightening.

The role of the Office of the Superintendent of Financial Institutions (OSFI) is to protect the safety and soundness of the Canadian financial system, with the interests of ordinary depositors at heart. In its first annual RiskWatch released Thursday, OSFI begins its list with two well-known fears, the danger of a major cyberattack and the housing market downturn, and then segues immediately into a third, less commonly mentioned threat: "the rapid development of digital innovation," including "risks and consequences arising from the digitization of money," such as cryptocurrencies.

Just under a year ago, the Bank of Canada still considered the phenomenon at most an "emerging financial vulnerability." "Despite their growing popularity, cryptoassets are not systemically important in Canada, either as an asset class or as payment instruments," it said in its Financial System Review.

It must be said that things are moving fast in this area, especially since the pandemic began. Launched in the wake of the 2008 financial crisis, crypto-currencies had initially surpassed US$600 billion worldwide in 2017, according to the International Monetary Fund (IMF), before falling back to around US$200 billion by early 2020. Then, they catapulted to 3 trillion last November, before returning to 2 trillion at the beginning of this year, with just over 800 billion, or 40 percent of the total, going to the notorious bitcoin alone, according to specialist site CoinMarketCap.

Careless investors

Under the authority of no central bank and created in a decentralized way by computers solving complex mathematical problems and thus producing chains of coded and authenticated transaction blocks (blockchain), these crypto-currencies promise all sorts of advantages, noted the IMF last fall in its Global Financial Stability Report. "They enable easy and fast payments and open the door to innovative financial services," including for poor or isolated populations that lack access to basic financial services.

But this is not without many dangers, starting with their users, it continued. Usually administered from offshore financial centers, crypto-currencies come without the transparency, oversight and protections that are generally taken for granted today. Essentially speculative in nature, their value fluctuates wildly, with Bitcoin recently rising from $29,800 to $67,600 in just six months, for example, before falling back to $35,000. And then they offer no recourse in the event of fraud, loss or hacking.

That didn't seem to bother the five per cent of Canadians who already held bitcoin between 2018 and 2020 so much, according to Bank of Canada surveys on the subject, the results of which were released this week. Yet nearly half of them reported having experienced a collapse in the value of their investment (18%), loss of access to their virtual wallet (14%) or fraud (12%). Mostly young male university graduates, these investors were more interested in the returns (39%) and the technological aspect of the experience (31%) than access to a new payment method (15%). They demonstrated an above-average understanding of how the crypto currency works, but a lower level of financial literacy.

Since then, the supply of cryptoassets has continued to grow. Now, we are seeing more and more crypto-currencies backed by baskets of currencies and government bonds, often in US dollars, which are supposed to be more stable and aptly called "stablecoins." Exchange-traded funds (ETFs) composed of cryptocurrencies are also available to investors.

Public or private currencies?

"As cryptoassets become more democratic, the potential impact on the broader economy will necessarily increase," the IMF observed last fall. One concern is that large multinationals will launch their own private cryptocurrencies, which would eventually replace the currencies of small countries in addition to expanding their control over the economy and consumers. A first experiment has already been tried unsuccessfully by Facebook with the "libra". The electronic payment platform PayPal and the credit card companies Visa and Mastercard are also working on projects.

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