Michelle Rempel-Garner: What do you want from your crypto?
A critical moment of reckoning for cryptocurrencies has arrived.
By: Michelle Rempel-Garner
Before you click away from yet another column on crypto, rejoice!
You don’t need to understand anything about cryptocurrencies to read this column. But you should care about why a critical moment of reckoning for cryptocurrencies has arrived, and how it might impact your finances and Canadian politics.
Events of the last year have drawn the attention of the Canadian equivalent of the eye of Sauron — politicians and regulators — upon cryptocurrenies. This is no small feat. Until recently, most politicians in Canada viewed cryptocurrencies as something inexplicable related to the internet that no one outside of a few weirdos in their parents' basements cared about.
That is no longer the case. What happened?
For starters, in February, cryptocurrencies were tied by media to funding of the trucker convoy.
Then, the Netflix documentary about the QuadrigaCX scandal premiered. It is the first easily digestible piece of content about the cryptoasset sector that has been widely viewed and understood in Canada. If you’ve watched it, you were probably left with questions about how a scandal of that magnitude could happen in Canada.
The cost of borrowing, or interest rates, have also risen in response to sharply rising inflation — the lessening of the buying power of the dollar. This makes all types of investors jittery, including those invested in cryptocurrencies.
Canadian Members of Parliament, both Liberal and Conservative, have from time to time been bullish on crypto; however, their ardour appeared to fade as the commodity proved more volatile, and it grew less clear which way the political winds were about to blow.
And in recent months, a major stablecoin, TerraUSD — a cryptocurrency purportedly designed to not wildly fluctuate in value — collapsed, causing significant market shockwaves. The price of several major coins like Bitcoin also crashed. El Salvador, a country which made Bitcoin legal tender, is worried about potentially defaulting. Coinbase, a major crypto trading platform, admitted that people using it could lose their crypto investments if the platform ever went bankrupt.
So even if you know diddly squat about crypto, it’s easy to see how to the average person, a lot of people losing a lot of money to something seemingly sketchy sounding is justifiable cause for concern.
This has created both a political and image problem for the industry. However, it was one that they saw coming.
Many people working in the industry itself have warned that a “wild west” regulatory environment isn’t a viable long-term option for either industry or government. In recent years there have been growing calls from the industry for clear policy that would provide protections, clarity and stability for those working and investing in the sector that would enable it to grow.
Meanwhile, in some corners of the government, there have been similar concerns about the impact to both the economy and government social programming if many Canadians lose chunks of their retirement, housing, or education savings — or go into debt — because of a largely unregulated investment.
The biggest threat to addressing these concerns in a smart way are the populist political poles of both the right and the left. To understand why this is happening, a small bit of technical information about something called blockchain is helpful.
Cryptocurrencies work because of platform technology called blockchain. Specialists will cringe at this oversimplification, but what blockchain does is decentralize the verification of transactions — and allows this to occur anonymously. In simple terms, when you pay for something with a debit card using traditional currency, a bank verifies that your transaction occurred. Verifying that a transaction occurred is important for a whole host of reasons. But blockchain enables transactions to be independently verified.
This means that governments could have significantly less regulatory oversight over transactions that they previously had sole domain over, with a cascade of implications falling from that loss of control.
Some of the benefits of this could mean that it would be easier to directly transfer financial aid to humanitarian organizations in countries where government corruption is rampant. It could enable the transfer of real estate without government involvement, preventing government erasure of property rights — a particular problem in countries with despotic leaders. It also could enable the transfer of funds to human rights activists in places with authoritarian rule. It could make it impossible for an authoritarian government to erase someone’s identity and make it as though they never existed. It could make supply chain management more agile. It could enable things like quadratic voting and financing, that is, a system of direct democracy and direct democratic crowdsourcing of public funds.
All of these innovations also have the potential for an enormous new and sustainable source of economic growth.
The downsides of no regulation are also clear. Blockchain could make it harder to track money laundering, or the financing of terrorism, organized crime and war. Because this type of technology is so new, regulators are only starting to define what type of an asset class cryptoassets are, so many Canadians don’t realize that their investments aren’t necessarily covered by regulations that prevent fraud in traditional securities trading. Also, as seen with the QuadrigaCX scandal, a single person holding a digital key could cost thousands of people a fortune. New ways to avoid taxation could emerge.
Given this, the global political dynamic that is emerging is one caught between far-left elements that want to quash any threat to state control and far-right elements that want to decentralize all aspects of government without any safeguards. The former is represented by governments like that of the Chinese Communist Party that have enacted complete bans, and the latter largely by Twitterati crypto-anarchists.
Investors, innovators, and industry are caught in between these poles.
Thankfully, there is no credible movement in Canada to outright ban cryptoassets. However, given the amount of money that’s being made without consistent regulations against pump-and-dump and bank-run-like activity, there is a strong push to keep the status quo of the current wild west environment. For the same reason, there is a push to regulate.
Those in the wild west camp are vocal and a constituency ripe for politicization. But the political reality is that those who lost savings due to market hype and a lack of regulations in the sector are far more likely to punish politicians who haven’t moved to provide protections than crypto Twitterati are to reward that same behaviour. And at present, the former also vastly outnumber the latter.
Facing an electorate that is becoming increasingly squeamish about cryptocurrencies, and having been informed by bureaucrats and corporate finance lobbyists who hate the potential for loss of control on transaction verification, in this environment the tendency of government ministers will be to overregulate. This will in turn make Canada less competitive for a technology sector that Canada should be a world leader in.
Neither this nor the status quo leads to an optimal outcome. So what does?
At the very least, political leaders should resist the temptation to make things worse. On one side of the debate, acting like cryptocurrencies are the root of all evil and over-regulating will chase away investment in the cryptoasset sector away from Canada. On the other hand, suggesting that no regulatory clarity is needed is equally as irresponsible.
The right approach involves government clearly signalling support for development of the sector while applying safeguards already present in other asset classes to crypto assets on a like-equals-like basis. To do this, industry and governments need to get together, figure out a minimum level of regulations needed to provide investment stability and consumer protection needed, without adding undue red tape, and make it so.
In Canada, where jurisdiction for this responsibility is spread between the federal and provincial levels, this probably means the federal government could act as a convener to help develop options for policy frameworks that are as harmonized as possible while respecting jurisdiction.
A large public-education campaign — even among politicians and bureaucrats — on the risks the current lack of policy lends to an average investor is also needed. People need to be educated so that they make informed choices before moving more than they can afford to lose into crypto-asset investment. Many run-of-the-mill crypto-asset investors simply don’t realize that the safeguards that are in place to prevent fraud in traditional securities trading do not exist for cyrpto-assets. For example, many don’t realize that there are Twitter bot farms dedicated simply to inflating the value of certain cryptocurrencies, and that this is currently legal. Many don’t realize that bank-run-type behaviours are being seen in certain stablecoins.
And many legislators don’t even know what crypto-assets are.
So, in January of this year, I started talking to colleagues in all political parties about a bill that I wanted to bring forward. I wanted to get a policy framework in place to address the crypto-asset sector, but from a pro-growth angle, because of the potential positive economic growth opportunities available to places like Calgary with a highly skilled labour force facing high unemployment rates.
I tabled the bill in February. It requires the Minister of Finance to consult with industry stakeholders and the provinces to develop a crypto asset policy framework that provinces could opt into. The debate on the bill, to date, has been thoughtful and robust, and largely free of political posturing. It has been overwhelmingly supported by industry and has already received positive feedback from some provincial governments.
Even if it doesn’t pass in September — it is politics after all — I hope that this is the tone and spirit that governments will approach this issue with in the future.
That’s because these issues will become ballot questions in future elections, because until they are resolved continued scandal and scams are an inevitability, as is the potential loss of investment in a truly innovative sector. Governments will have to act — the only question left is how they will.
The challenge for you, dear reader, is to determine what you want from both your finances and your politicians on this matter, and to demand it. And in the meantime, be wary of anyone telling you in certain terms to both avoid or buy their dip.
Michelle Rempel-Garner is a Conservative MP who represents the riding of Calgary Nose Hill.
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