An annual report outlining the most important financial risks and economic vulnerabilities was issued on Thursday by the Bank of Canada in its financial system review. Also, stating that crypto volatility is an emerging vulnerability to Canada’s financial system.
According to the bank, an important obstacle to the wide acceptance of crypto assets as a means of payment, is its price volatility stemming from speculative demand and they continue to be considered high risk because their intrinsic value is hard to establish, despite the broadening institutional interest in crypto assets.
Wiping about $1 trillion in market value in a matter of days, the warning comes shortly after the crypto market saw one of its wildest crashes in history. Bitcoin experienced a massive sell-off, tumbling to nearly touch $30,000 on Wednesday, marking another milestone of extreme volatility on crypto markets, after surging above $64,000 last month.
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.