March 14, 2022
What’s ahead for cryptocurrency? UCalgary expert explores regulatory changes and Russian questions
Recent developments have thrust the volatile cryptocurrency market into the glare of an international spotlight once again.
In recent days, Russia raised fears the country is relying on cryptocurrencies to trade with international partners, evading international sanctions in the wake of the Ukraine invasion. Last week, amidst spiking popularity of digital currency, U.S. President Joe Biden ordered his government to assess the risks and opportunities of creating a central bank digital dollar.
Dr. Alfred Lehar, PhD, associate professor of finance at the Haskayne School of Business, is one of a number of UCalgary scholars across academic disciplines who study emerging trends in the fast-moving financial technology sector.
Cryptocurrency is a type of decentralized currency that uses digital ledgers to record transactions, and digital signatures to keep the transactions safe. The cryptocurrency can be a value to itself as a form of investment, or used to buy and sell services in the marketplace, or used to record ownership of assets.
Lehar is one of five UCalgary researchers from the fields of data security, privacy, and financial technology who took part in a Bank of Canada research competition proposing what a regulated North American digital currency ecosystem could look like. Meanwhile, UCalgary students learn about research on the frontiers of the emerging field as they prepare for the job market.
Lehar spoke with UToday about how the cryptocurrency market has grown in popularity, the significance of Russia’s actions and U.S. changes, and what they mean to the average Canadian investor.
Appeal of currency competition
Q: How popular is cryptocurrency in Canada, and what’s behind its growth?
A: There is no precise data on how many people use crypto but it is popular because it represents a new class of investment opportunities with potential high returns and diversification opportunities. Some people just want to try out the new technology and gain experience.
Q: What ongoing opportunities and issues does cryptocurrency pose for individual investors? For governments?
A: Cryptocurrencies offer a glimpse into new technologies that will make finance and payments for everyday things more efficient. For example, using cryptocurrency, one could make a payment for a house conditional on the deed of the property being transferred — avoiding the need for lawyers who hold funds in escrow. Another example is that a mortgage can be tied to a fire insurance and the bank can reduce its risk by having a cryptographic proof that the borrower has a fire insurance. Farmers can automatically receive crop insurance payments based on the amount of rainfall. The governments realize that these efficiency gains will pose a competitive advantage for their economies and have real benefits for citizens. Most governments are therefore working on issuing their own cryptocurrencies, Central Bank Digital Currencies (CBDC).
Costs and risks
Q: What are the environmental costs of producing cryptocurrency?
A: The Bitcoin network is estimated to consume as much electricity as Belgium. Most current blockchains use a proof-of-work algorithm to confirm their security; this computational process requires “miners” to solve a hard puzzle that consumes a lot of electricity. A new technology called “proof of stake” will resolve this problem soon and decrease energy consumption by 99.9 per cent so that cryptocurrencies will not pose an environmental problem any more.
Q: OK, recently, we’ve seen in the news that Russia may be using crypto markets to evade sanctions imposed by Western nations over the country’s military invasion of Ukraine. Is this happening?
A: Bitcoin is one potential channel to circumvent sanctions for totalitarian governments. However, there are perhaps easier alternatives as banks in many other countries around the world are happy to do business with sanctioned entities.
As long as some countries do not participate in the sanctions, there will be opportunities to work around them. This could be in crypto, or, in fiat currency issued by government.
U.S. moves and impacts
Q: U.S. President Biden signed an executive order on March 9, urging the Federal Reserve to create its own digital currency. Can you unpack how this move by regulators in the U.S. is influenced by the situation in Russia?
A: I do not think that this is driven by Russia. China has already performed large-scale testing of its own CBDC and many other countries around the world are following suit. With a harsh attitude towards crypto, the U.S. would lose its technological lead and risk falling behind. Crypto is a reality and governments should embrace this new technology and realize the efficiency gains for their economy. Canada has been looking into creating its own digital currency for a while and it is good that the U.S. is doing the same.
Q: What could Biden’s executive order mean for the global crypto market in the longer term?
A: It is a positive signal that the U.S. is recognizing the good aspects of this new technology. Many participants in the crypto space want to be regulated and appreciate that the government is engaging in this space.
Q: What do you think Canadian cryptocurrency investors should be paying close attention to through all these changes?
A: While it is not clear that specific cryptocurrencies will still be around in 10 years, it is clear that this technology will have a huge impact on all businesses and individuals going forward. Everybody should at least play around with this new technology and discover its potential. It is important to gain experience with this technology early to be ready for the future. Firms that do not engage in this space could become disrupted very quickly.
Students explore opportunities and pitfalls
Q: How have students and researchers at the Haskayne School of Business been involved in exploring the implications of cryptocurrencies in an increasingly digital world?
A: In my research I study the functionality of blockchain-based exchanges and lending markets. These innovations will disrupt traditional financial markets such as exchanges and banks and change the way users trade assets and borrow funds. We also examine the problems that blockchain technologies bring. Settlement in traditional financial markets is done by impartial government-regulated entities. Competing private settlers in blockchain systems will put their own benefit ahead of the users’ and have an incentive to extract some of the benefits of this new technology for themselves. We also worked with the Bank of Canada on the design of a Canadian cryptocurrency.
In teaching, we have had a class on fintech for three years and will expand our offerings next year with a class on decentralized finance (DeFi). In our DeFi lab I work with a small number of undergraduate and graduate students on cutting-edge research questions, which allow the students to learn the latest technology. One of my former BCom students is now head of research at a global blockchain analytics company.
Watch a Haskayne Hour video: Blockchains beyond Bitcoin: The rise of decentralized finance. How does decentralized finance change the way we can use money? What are the challenges of regulation in a decentralized environment?