Why Crypto Became Kaboom – Macleans.ca

Ryan Clements is Assistant Professor and Chair of Business Law and Regulation at the University of Calgary

Rnow, there is more than 20,000 types of cryptocurrency in the world. This goes against one of the central ideas of Bitcoin – the very first cryptocurrency – which promised a supply cap. Crypto was meant to be many things: a kind of “digital gold,” something you put money into during turbulence; a store of value; and a medium of exchange with a decentralized financial system. So far it has been too volatile to perform any of these functions.

There are no exact numbers, but survey data suggests that around 14% of Canadians hold crypto. The crash we’ve seen this year – in which the crypto economy lost US$2 trillion in just a few months – is partly because, in the midst of an already difficult economy, people sell crypto as the riskiest asset in their portfolio. The other issue is the broader world of decentralized finance, or DeFi. DeFi uses blockchain technology to replicate traditional financial services – like exchanges, banks, lenders and asset managers – in a cheaper way and faster than legacy institutions. In DBedridden, DeFi has become an opaque system devoid of the regulatory oversight that helps Canadians trust traditional banks.

An example of this lack of oversight is the case of Anchor, a lending and borrowing protocol from the creators of the cryptocurrency Terra. At one point, Anchor was offering investors 20% fair interest to make deposits. How was this possible when traditional banks paid almost nothing to their customers? This is exactly the kind of behavior that led to the spring crash: Anchor failed and Terra’s Luna token crashed from $80 per token to less than $1. This all passed to Celsius Network, which billed itself as the world’s top crypto lender before freezing withdrawals from its 1.7 million customers in mid-June. In July, Celsius filed for bankruptcy.

When you look at who’s investing in crypto, it’s easy to see it’s not democracy financial system it was promised to be. A very small number of players have massignificant amounts of assets. They are the so-called “whales” in the market, and when they sell large positions there are catastrophic effects on prices.

For crypto to be a part of life for most Canadians – for that 14% to grow to 90% – it has to perform a function other than just sliding up and down. Otherwise, people might just look at the stock market, where it’s easier to invest and where the value of your assets is more transparent. Crypto investors should be able to use it in ways that have been discussed but not fully realized, such as getting a business loan or transferring money securely across the globe.

What might help move it in that direction is more regulation. Canada is already ahead of the curve when it comes to regulating crypto exchanges and assets that have similar properties to traditional securities. But there are a few other areas that need attention: first, Canada needs to extend its regulatory framework to stablecoins, which claim to be more reliable than other cryptos because they are tied to real money. (Terra demonstrated otherwise.) Stablecoins need to be better defined and subject to consumer protection.

Second, the federal and provincial governments may need to adopt legislative solutions that bring the DeFi system under the supervision of the securities regulator. In the United States, the SEC recently proposed measures to regulate certain DeFi exchanges; it is possible to do it in Canada too. Promotion must also be regulated. A group of investors got into crypto simply because Matt Damon told them to be brave. People need to understand that cryptocurrencies are not the same as money. Crypto deposits, like Celsius, are not covered by the Canada Deposit Insurance Corporation. Crypto banks are not at all like real banks – there is no protection if they fail.

Some say crypto will be wiped to zero, while others say it’s our entire financial future. I agree with Jon Cunliffe, Deputy Governor of the Bank of England, who recently compared the crypto crash to the dot-com crash of the late 1990s. companies is gone, but the technology has not disappeared,” he told the Point Zero Forum in Zürich. “Those that survived – the Amazons and the eBays – turned out to be the dominant players.” These players just have to be trustworthy.

This is part of Maclean’s Guide to the Economy, which appeared in the September 2022 issue. Read the rest of the feature, order your copy of the issue and subscribe to the magazine.

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