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According to the Bank of Canada, crypto volatility is an emerging weakness in Canada’s financial environment, while stablecoins pose threats to the country’s monetary system.
Following a significant cryptocurrency sell-off, Canada’s central bank reported that digital currencies such as Bitcoin (BTC) continue to be a high-risk commodity, amid widespread acceptance by institutional investors.
The Bank of Canada issued on 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 message comes just days after the crypto market saw one of its most violent crashes in history, wiping out almost $1 trillion in market value in a matter of days. Following a surge over $64,000 last month, Bitcoin suffered a major sell-off, plummeting to nearly $30,000 on Wednesday, marking yet another milestone of unprecedented uncertainty in crypto markets.
However, turbulence is not the only source of concern for the Canadian central bank. The central bank also warned about the dangers of stablecoins, a form of cryptocurrency that is usually backed by assets such as national currencies or standard financial assets to escape volatility. According to the bank, stablecoins’ lower volatility can make them more desirable for use as a means of payment and a 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 stated that cryptocurrencies such as Bitcoin have grown in popularity over the last year, with the crypto market capitalisation exceeding $2 trillion in May 2021, up from $200 billion in early 2020. The authority has said that the introduction of closed-end funds and exchange-traded funds has made cryptocurrency more available to Canadian investors.
As previously reported, 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 such as 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.