With the recent buzz surrounding cryptocurrencies, the need for a policy response from governments, regulators, and central banks is growing, say RBC economists in a new report.
According to the report, Five ways that 2017 left its mark, the combined market value of cryptocurrencies soared from just under US$18 billion at the start of 2017 to almost US$500 billion by mid-December.
“Bitcoin led the pack, accounting for some 60% of the total, although the cryptocurrency market also diversified. Bitcoin’s made-in-Canada rival, ethereum, moved from relative obscurity in January (then valued at some US$700 million) to more than US$42 billion in mid-December,” the report says, and the top 99 cryptocurrencies behind bitcoin also saw their combined market share triple.
With this growth, “the need for a policy response has become more urgent,” the report says. “Governments, regulators and central banks are working to understand and manage the macro-prudential, market conduct, consumer protection and security issues raised by the emergence of cryptocurrencies.”
Cryptocurrencies aren’t in a position to replace traditional money yet, the report says, as they don’t fulfill the basic functions of money, such as serving as a medium of exchange and a store of value.
However, the report questions what it will mean if for central banks if cryptocurrencies become more money-like.
It also also raises the question of consumer safety. “Canadian securities regulators are paying attention to the types of frameworks that will be needed to manage cryptocurrencies responsibly,” the report says, noting that regulators have started approving specific initial coin offerings (ICOs).
Governments must also grapple with the challenge of regulating cryptocurrencies and blockchain systems without stifling innovation, the report says.
“As the pre-financial crisis experience shows ‘bad innovation’ is possible however Canada risks losing out if it fails to nurture an ecosystem that evolves into a foundational aspect of the future economy,” it says.