The recent price plunge of cryptocurrencies has alarmed global authorities about the risk in some projects – like Terra’s ecosystem. In the context that regulatory overhauls targeting the industry may be around the corner, the Central Bank of Canada also voiced the urgency of imposing such rules before the sector has become so big that it could bring down the overall financial market at one point.

Regulatory Urgency

Carolyn Rogers – Bank of Canada Senior Deputy Governor – said in an interview with Reuters that regulating the industry has become increasingly pressing as more people have invested in the asset class.

She was worried that as the industry keeps growing rapidly, attracting new investors who may not understand the risk involved, a violent price drop may eventually lead to a spillover effect onto the broader financial system.

“This is an area that is still small, but it’s growing really rapidly. We don’t want to wait until it gets a lot larger before we bring regulatory controls in place.”

The Deputy Governor viewed the sector as a “largely unregulated area” where investors tried to earn “quick gains” without much knowledge as a whole. According to a recent survey conducted by the bank,  13% of Canadians owned Bitcoin in 2021, up from 5% as recorded the year before.

Despite the urgency of introducing relevant regulations, she acknowledged difficulties in categorizing and overseeing the asset class within the existing regulatory framework.

“These are somewhat like banking assets, somewhat like capital markets,” she said. “One of the challenges is to figure out how do they fit in the current regime, and if they don’t fit, how do we adjust the regime so that they will fit.”

“Bitcoin Is Not a Hedge”

Like most Central Banks worldwide, the Bank of Canada also has a cautious take on cryptocurrencies. When asked if Bitcoin can help Canadians opt-out of the decades-high inflation by Liberal MP Yvan Baker, Rogers replied that the bank doesn’t see it as a solution for inflation nor recognize it as “a stable source of value.” However, she admitted that some “important innovations” occurred within the crypto space.

Contrary to its relatively neutral attitude on cryptocurrencies, the bank is currently in the development stage for a possible CBDC. In March, it announced a partnership with MIT on a one-year research project to explore the potential design of a CBDC and how such a product would interact with the financial system.