Bank of Canada warns of high risks in Bitcoin and Ethereum investments

Cryptocurrencies are high-risk assets with an undetermined intrinsic value. This warning is contained in the Bank of Canada’s annual review of vulnerabilities and risks in the financial sector.

The central bank noted a sharp rise in crypto market capitalization from $200 billion at the start of 2020 to more than $2 trillion by May this year.

The regulator also identified a potential threat in the issue of a stablecoin by a large technology company with a significant user base. It would be issued without a peg to a national currency.

If the backing for stablecoins is not in Canadian dollars, the central bank could face difficulties in implementing monetary policy and as a lender of last resort, the report says.

The regulator’s recent approval of the launch of ETF on Bitcoin and Ethereum, in the regulator’s view, will not have serious consequences.

The impact of these instruments is not systemic due to their small size relative to the market, the document explains.

According to the regulator, the rapid evolution of the cryptocurrency market creates risks to financial stability. It stressed that these assets do not currently pose a systemic risk in Canada, neither as an asset class nor as a means of payment, despite broad media coverage.

In October 2020, the Bank of Canada described central bank digital currencies (CBDCs) a threat to financial stability. In December the regulator acknowledged the need to accelerate the release of the digital version of the national currency.

In February 2021, the Bank of Canada’s deputy governor called Bitcoin’s rally «speculative mania».

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