First considered with curiosity and amusement, cryptocurrencies are less and less laughing and more and more scary.
The role of the Office of the Superintendent of Financial Institutions (OSFI) is to protect the safety and soundness of the Canadian financial system, particularly by having the interests of ordinary depositors at heart. In his first Annual Risk Outlook unveiled Thursday, OSFI begins its list with two well-known fears, namely the danger of a major cyberattack and the housing market downturn, then immediately continues with a third less often mentioned threat: “the rapid development of digital innovation”, including “the risks and consequences arising from the digitization of money”, such as cryptocurrencies.
A little less than a year ago, the Bank of Canada still considered the phenomenon at best an “emerging financial vulnerability”. “Despite their growing popularity, crypto-assets are not systemically important in Canada, either as an asset class or as instruments of payment,” she said in her Financial System Review.
It must be said that things are changing quickly in this area, particularly since the start of the pandemic. Launched in the wake of the 2008 financial crisis, cryptocurrencies first topped US$600 billion globally in 2017, according to the International Monetary Fund (IMF), before falling back to around US$200 billion in early 2020. Then, they were catapulted to reach 3 trillion last November, before falling back to 2 trillion at the beginning of this year, at a rate of just over 800 billion, or 40% of the total, just for the famous bitcoin, according to the specialized site CoinMarketCap.
Careless investors
Placed 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 (blockchainin English), these cryptocurrencies hold out all sorts of advantages, the IMF noted last fall in its Global Financial Stability Report. “They allow easy and fast payments and pave the way for innovative financial services”, including for poor or isolated populations who do not have access to basic financial services.
But this is not without many dangers, starting for their users, we continued. Usually administered from offshore financial centers, cryptocurrencies 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, for example, and in the space of just six months, from $29,800 to $67,600, before falling back to $35,000. And then, they offer no recourse in the event of fraud, loss or piracy.
This did not seem to bother the 5% of Canadians who already held bitcoins between 2018 and 2020, according to surveys carried out on the subject by the Bank of Canada and whose results were presented this week. However, nearly half of them reported having been victims of a collapse in the value of their investment (18%), loss of access to their virtual portfolio (14%) or even fraud (12% ). Mainly made up of young men with university degrees, these investors were more interested in returns (39%) and the technological aspect of the experience (31%) than in access to a new method of payment (15%). They demonstrated an above-average understanding of how this cryptocurrency works, but a lower level of financial knowledge.
Since then, the supply of cryptoassets has continued to grow. Now we see more and more cryptocurrencies backed by baskets of currencies and government bonds, often in US dollars, supposed to be more stable and aptly called “stablecoins”. Exchange-traded funds (ETFs) made up of cryptocurrencies are also available to investors.
Public or private currencies?
“As crypto-assets become more popular, the potential repercussions on the wider economy will necessarily increase,” observed the IMF last fall. Among other things, there are fears that large multinationals will launch their own private cryptocurrencies, which would eventually replace the currencies of small countries in addition to extending their control over the economy and consumers. A first experiment has already been tried without success by Facebook with the “libra”. The electronic payment platform PayPal and the credit card companies Visa and Mastercard are also devoting projects to it.
In response, more and more central banks are working on plans to launch their own digital currencies. This is particularly the case in Canada. “The Bank of Canada has been trying to determine for several years the conditions that could lead our country to issue such a currency. The pandemic could make us make a decision faster than expected, ”said its deputy governor, Timothy Lane, a year ago in Montreal.
The question to ask is: what is the soul of money? argued at the beginning of the year Agustín Carstens, managing director of the Bank for International Settlements, the club of central banks in the world. “Money is a social convention, a public good. People accept it today because they expect it to be accepted tomorrow,” he recalled. Moreover, “the soul of money is trust. The question therefore becomes: which institution has the best chance of generating this trust? »