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.