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Crypto poses no big risk to economy so far, Bank of Canada official says

Canada is one of the first countries to approve a Bitcoin ETF and is the fourth-largest nation in terms of hash rate.

Cryptocurrencies like Bitcoin (BTC) do not pose any significant risk to the financial system at their current level of adoption, according to Bank of Canada’s Deputy Governor Paul Beaudry.

Beaudry spoke about the risks to the stability of the Canadian financial system at the Ontario Securities Commission Dialogue 2021 on Nov. 23.

When asked whether cryptocurrencies are a risk, the deputy governor responded that the Bank of Canada doesn’t think that crypto is “developing in a way that creates a systemic type of risk for a financial system” up to now. This is because cryptocurrencies are “quite removed from a financial system,” Beaudry noted.

But as the crypto market grows bigger with more people investing in it, crypto becomes more of a risk, which could mean a certain level of vulnerability, the official said:

“We’re not at the point yet of thinking this a big risk for the economy but this is something we’re keeping an eye on very closely.”

Beaudry also stressed that classic cryptocurrencies like Bitcoin do not play much of a role in payments as investors buy BTC “mainly to speculate.”

But there are also digital assets like stablecoins that are backed by assets and fiat currencies, which could potentially play a bigger role in payments, he said. “That’s something we’re also keeping an eye on,” Beaudry added.

Canada has emerged as one of the world’s most crypto-friendly countries, becoming one of the first jurisdictions in the world to approve a Bitcoin exchange-traded fund. Canada has also been a popular spot for global crypto miners, ranking the fourth largest nation in terms of hash rate according to Cambridge Bitcoin Electricity Consumption Index as of August 2021.

Related: Fidelity clears regulatory hurdle to become Canada’s first institutional Bitcoin custodian

But despite progressive crypto development and adoption, the Bank of Canada has expressed some skepticism about crypto before. In May, Canada’s central bank said that digital assets like Bitcoin remain a highly risky asset despite adoption by institutional investors.

“Price volatility stemming from speculative demand remains an important obstacle to the wide acceptance of crypto assets as a means of payment,” the Bank of Canada wrote in its financial system review on the most important financial risks and economic vulnerabilities.

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Study suggests Canadian CBDC could promote digital innovation within the country

The Bank of Canada suggested that a Canadian CBDC could provide a number of innovations, including the elimination of transaction fees from debit and credit cards.

A study released by Canada’s central bank, Banque du Canada, has noted a number of favorable reasons that the country could benefit from its own Central Bank Digital Currency, or CBDC.

The document laid out two scenarios that might result in the bank issuing a CBDC at some future date. One would be if citizens were no longer widely using cash within the country for reasons that were left unspecified. The other could be if a digital currency, public or private, were to become so widely adopted as to threaten the sovereignty of Canada’s existing central currency.

Participants did not see either scenario as a likely outcome in the near future, but noted that an interest in stablecoin regulation and adoption had increased within the country in recent months. Even so, the study found that cryptocurrencies and stablecoins used as a means of payment in Canada are currently a “novelty for a small number of enthusiasts.”

Related Bank of Canada sees no strong case for a digital dollar — For now

The document acknowledged a number of potential benefits inherent to the adoption of a CBDC. Namely that the technology could have the same level of safety as cash while allowing for use in payment systems for online transactions and peer-to-peer transfers. When compared to payment options like credit or debit cards, a CBDC would also not necessarily have the same type of transaction fees for retailers:

“A CBDC could be a simpler competition policy tool because it would provide an alternative low-cost payment instrument for customers and merchants. This would help bring down the interchange fees charged by the established networks.”

That a CBDC could potentially support smart contracts was also a point of interest, as they could increase the speed and accuracy of execution by automating actions that are typically done manually. Participants felt that smart contracts would create some risk for users however, given that smart contract developers would likely be independent from the bank’s CBDC platform. This could be problematic if the execution of the contract did not follow the terms agreed upon, whether purposely or otherwise. They advised that smart contracts, as well as the programmability of a Canadian CBDC, would need to be studied further before implementation is decided.

There could be many benefits to creating a CBDC for Canada. The study explained:

“In general, we argue that a CBDC might be beneficial and probably necessary to ensure a competitive and vibrant digital economy.”

Canada is not the only country looking into possibly implementing a CBDC. Last week while speaking to the House of Representatives, Chairman of the Federal Reserve Jerome Powell said there would be no need for stablecoins or cryptocurrency if there was a digital U.S. dollar. A paper focusing on the benefits and risks of a digital dollar is expected to be released sometime in September.

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Bank of Canada sees no strong case for a digital dollar — for now

Amid the global CBDC race, the Canadian central bank does not currently see a strong case for issuing a state digital currency.

The Bank of Canada does not see a strong reason for issuing a central bank digital currency, or CBDC at the moment.

Timothy Lane, the Bank of Canada’s deputy governor and head of research at the bank’s fintech and crypto department, spoke on CBDC issues at a Wednesday panel, Reuters reports.

According to the official, the Canadian central bank is now focused on CBDC implementations in more concrete terms, thinking about how it might work and look. However, the Bank of Canada has not found any solid case for issuing a CBDC, Lane said:

“In terms of where we are with the project, we don’t currently see a strong case for issuing it, but the world is progressing very rapidly and probably even more so in the wake of the pandemic.”

Not only does the Bank of Canada not see a solid case for issuing a CBDC but also it has outlined a number of risks related to a state digital currency previously. In October 2020, the bank issued a report on CBDC-associated risks, paying special attention to threats arising from CBDC storage issues and competition between crypto exchanges and banks in terms of attracting users.

Last December, Lane said that the global coronavirus pandemic could force Canada to launch a CBDC sooner than originally expected. “I would say that in the last nine months we’ve seen developments that look like they’re in the direction of some of those things coming to pass sooner than expected,” he said in late 2020.

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Bank of Canada: Crypto highly risky despite institutional adoption

Crypto volatility is an emerging vulnerability to Canada’s financial system, while stablecoins pose risks for the country’s monetary system, the Bank of Canada said.

Following a major cryptocurrency sell-off, Canada’s central bank stated that digital assets like Bitcoin (BTC) remain a highly risky asset despite their adoption by institutional investors.

The Bank of Canada issued Thursday its financial system review, an annual report outlining the most important financial risks and economic vulnerabilities. As part of the review, the central bank paid specific attention to cryptocurrencies, stating that crypto volatility is an emerging vulnerability to Canada’s financial system:

“Price volatility stemming from speculative demand remains an important obstacle to the wide acceptance of crypto assets as a means of payment. Despite the broadening institutional interest in crypto assets, they continue to be considered high risk because their intrinsic value is hard to establish.”

The warning comes shortly after the crypto market saw one of its wildest crashes in history, wiping about $1 trillion in market value in a matter of days. After surging above $64,000 last month, Bitcoin experienced a massive sell-off, tumbling to nearly touch $30,000 on May 19, marking another milestone of extreme volatility on crypto markets.

But volatility is not the only subject of the Canadian central bank's concern. The central bank also pointed out risks associated with stablecoins — a type of cryptocurrency that is typically backed by assets like national currencies or traditional financial assets to avoid volatility. According to the bank, the less volatile nature of stablecoins could make them more suitable for use as a means of payment and store of value.

“But stablecoins still share some of the same risks as other crypto assets. Notably, unless stablecoins are backed exclusively by Canadian dollars, their widespread adoption could inhibit the Bank’s ability to implement monetary policy and act as lender of last resort,” the bank stated.

The Bank of Canada mentioned that cryptocurrencies like Bitcoin have been increasingly popular over the past year, with the crypto market capitalization surging above $2 trillion in May 2021 from just $200 billion in early 2020. The authority also noted that crypto has become more accessible to investors in Canada with the arrival of closed-end funds as well as exchange-traded funds, or ETFs.

As previously reported by Cointelegraph, Canada is one of the first jurisdictions around the world to approve a Bitcoin ETF. In April, Canada-based investment fund manager 3iQ launched a Bitcoin ETF in partnership with major European digital asset manager CoinShares. Other fund managers like Purpose Investments and Evolve Funds Group previously launched Bitcoin ETFs as well, with nearly $1.3 billion and $100 million in assets under management as of mid-April, respectively.

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