Right now, there are more than 20,000 kinds of cryptocurrency in the world. This goes against one of the central ideas of Bitcoin—the very first cryptocurrency—which promised a cap on supply. Crypto was supposed to be many things: a kind of “digital gold,” something that you put money into when there’s turbulence; a store of value; and a medium of exchange with a decentralized financial system. So far, it’s been too volatile to fulfill any of those functions.
There aren’t exact figures, but survey data suggests that about 14 per cent of Canadians hold some crypto. The crash we saw this year—during which the crypto economy lost US$2 trillion in mere months—is partly because, in the midst of an already rocky economy, people are selling off crypto as the riskiest asset in their portfolio. The other problem 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 way that’s cheaper and faster than legacy institutions. In reality, DeFi has become an opaque system that lacks the regulatory oversight that helps Canadians trust traditional banks.
One 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 per cent interest just for making deposits. How was that possible when traditional banks were paying customers close to nothing? This is exactly the kind of behaviour that led to the spring crash: Anchor failed, and Terra’s Luna token collapsed—plummeting from US$80 per token to less than US$1. All of that carried over to Celsius Network, which touted itself as the world’s leading crypto lender before freezing withdrawals for its 1.7 million customers in mid-June. By July, Celsius had filed for bankruptcy.
When you look at who invests in crypto, it’s easy to see that it’s not the democratic financial system it was promised to be. A very small number of players have massive amounts of assets. Those are the so-called “whales” in the market, and when they sell off large positions, there are catastrophic effects on prices.
In order for crypto to become a part of most Canadians’ lives—to get that 14 per cent up to 90—it has to play a function other than simply sliding up and down. Otherwise, people could just watch the stock market, where it’s easier to invest and the value of your assets is more transparent. Crypto investors need to be able to use it in ways that have been discussed but not fully realized, like getting a business loan or transferring money safely across the world.
What could help move it in this direction is more regulation. Canada is already ahead of the curve when it comes to regulating crypto exchanges and assets that have properties similar to traditional securities. But there are a few more areas that need attention: first, Canada needs to extend its regulatory framework to stablecoins, which claim to be more trustworthy than other crypto because they are pegged to real money. (Terra has demonstrated otherwise.) Stablecoins need to be better defined and subject to consumer protections.
Second, the federal and provincial governments may need to enact legislative solutions that bring the DeFi system under the supervision of the securities regulator. In the United States, the SEC has recently proposed steps to regulate certain DeFi exchanges; it’s possible to do that in Canada, too. Promotion needs to be regulated, too. A bunch of investors got into crypto just 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 backed by the Canada Deposit Insurance Corporation. Crypto banks are not like real banks at all—there are no protections if they go bankrupt.
Some say crypto will get wiped to zero, while others say it’s the entirety of our financial future. I agree with Jon Cunliffe, a deputy governor at the Bank of England, who recently likened the crypto crash to the dot-com crash of the late 1990s. “A lot of companies went, but the technology didn’t go away,” he said at the Point Zero Forum in Zürich. “Those that survived—the Amazons and the eBays—turned out to be the dominant players.” Those players just need to be trustworthy.