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Carolyn Wilkins: to achieve benefits, crypto must be made as safe as Canada’s financial system

Financial Post | Carolyn Wilkins | Feb 16, 2022

bitcoin accepted - Carolyn Wilkins:  to achieve benefits, crypto must be made as safe as Canada's financial systemIf done well, we can achieve benefits of financial innovation for households and businesses and avoid build up of systemic risk

We know that most of the new kids in town were law-abiding pioneers, some with an admirable rebellious streak. They were driven by reinvention, expansion and to challenge the establishment.

The crypto frontier has these characteristics. Expansion is clear. The crypto market has exploded from just US$16 billion five years ago to some US$2 trillion today. There’s reinvention too. The crypto ecosystem is challenging the traditional financial system, which, for all its strengths, is also often inefficient, expensive and exclusive. Some of the pioneers have Canadian roots: Vitalek Buterin, co-founder of Ethereum, just made the Maclean’s power list.

See:  Major Firms Launch the Crypto Market Integrity Coalition to Crackdown Manipulation

We need to sort out what differentiates a bandit from a law-abiding pioneer to achieve the benefits of financial innovation for households and businesses, and avoid the build up of systemic risk. Clear and proportionate legal and regulatory frameworks for the emerging crypto ecosystem is the right way to do this.

What are some of the issues? Let’s start with an unbacked crypto asset such as bitcoin. Bitcoin lacks a credible mechanism to stabilize its value, so its price is highly volatile. That’s why bitcoin is a speculative asset rather than money, and why individual holdings are subject to capital gains taxes in many jurisdictions.About 95 per cent of the crypto market is unbacked. Much more needs to be done with respect to investor protection and market integrity, particularly given that exposure to these assets is widening to retail investors via crypto exchanges and financial products such as crypto-based ETFs. While authorities around the world have begun to respond, regulatory frameworks are still very much a work in progress.
To its credit, the Canadian Securities Administrators was one of the first to establish registration requirements for crypto trading platforms. The CSA has also set expectations with regards to client protection. It’s a start. What’s trailing are the regulatory, supervisory and enforcement capacities
Here’s another place where suitable regulation could help. The Bank of England’s Financial Policy Committee, of which I am a member, has set out intuitive expectations for systemic stablecoins. Canada doesn’t need to start from scratch. It can look to the Bank of England’s efforts and other international work in this area as it considers its own regulatory response.

See:  Updated Report: Regulation of Cryptocurrency Around the World (Nov 2021)

The opportunities and risks extend beyond the crypto assets themselves. Lending, insurance, and other financial services are rapidly changing. It’s increasingly enabled by DeFi, or decentralized finance, running predominantly on the Ethereum blockchain.

Even so, DeFi arrangements raise familiar issues that will require regulation. The most immediate issues relate to fraud, misappropriation, conflicts of interest and cyber attacks. In some cases, despite claims to the contrary, operations and activities within DeFi are governed or administered by a small group of developers and investors.

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NCFA Jan 2018 resize - Carolyn Wilkins:  to achieve benefits, crypto must be made as safe as Canada's financial system The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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