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Crypto crash: How the market came crashing down – CTV News

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It’s been another bad week for the cryptocurrency market.

On Sunday, crypto lending and trading platform Celsius Network announced that it would be pausing all withdrawals and transfers. Coinbase, another crypto trading platform, also laid off 18 per cent of its workforce on Tuesday and warned of an extended “crypto winter.” And on Saturday, the price of Bitcoin fell below US$20,000 for the first time since 2020.

This crash kicked off last month, as the U.S. Federal Reserve signalled its intention to hike interest rates to combat inflation, prompting investors to sell off risky assets like crypto holdings. But it’s not the only factor that explains the recent collapse in the crypto market.

Many crypto-trading platforms had been offering decentralized financial products, also known as DeFi. DeFi enables users to borrow, trade and earn interest off of cryptocurrency holdings, similar to a bank.

“The DeFi ecosystem purports to provide a parallel financial system to the traditional financial system. It’s effectively an effort to replicate traditional functions of the financial system by using open source global decentralized blockchains,” Ryan Clements, an associate professor at the University of Calgary’s Faculty of Law, told CTVNews.ca over a video interview on Saturday.

But the DeFi ecosystem often relies on algorithmic stablecoins, which are cryptocurrencies that attempt to fix their value at a consistent rate through the use of computer calculations that control their supply, offering investors a purportedly stable alternative to volatile cryptocurrencies like Bitcoin.

But in May, the value of TerraUSD, a popular stablecoin, dropped from around US$1 to less than 10 cents. As of June 18, that cryptocurrency is worth less than a penny.

“That failed in a catastrophic fashion and that had a cascade effect on the larger crypto market, which accelerated the selling pressure,” Clements said.

Some of these crypto exchanges, such as Celsius, operated on a fractional reserve system just like a bank, where it would lend out crypto assets that it receives as deposits. But as selling pressure intensified, Celsius halted withdrawals and transfers.

“There was a run on Celsius as a crypto bank and Celsius had to freeze all withdraws because it couldn’t meet the depositor demands,” Clements explained.

While crypto exchange platforms may offer services similar to what a bank offers, Clements notes that there are far fewer protections. Unlike bank deposits, which are insured by the Canadian Deposit Insurance Corporation, crypto deposits have no insurance, meaning that all of your assets could be gone if your crypto platform shuts down.

That’s what happened in 2019, when the B.C.-based crypto exchange Quadriga shut down. Its clients collectively lost at least $169 million.

CALLS FOR BETTER CRYPTO REGULATION

Experts say the crashing crypto market is underscoring the need for stronger consumer protection in the sector in order to protect Canadians.

“This is an area that is still small, but it’s growing really rapidly. And it is largely unregulated,” Carolyn Rogers, senior deputy governor of the Bank of Canada, told Reuters on Thursday. “We don’t want to wait until it gets a lot larger before we bring regulatory controls in place.”

Back in February, Conservative MP Michelle Rempel Garner introduced a private member’s bill to the House of Commons calling on the minister of finance to develop a national regulatory framework for cryptocurrency.

“The market instability we are seeing today further emphasizes the need to talk about how to both protect people, and provide regulatory stability for growth in the cryptoasset sector,” Rempel Garner said in a statement last month, as crypto assets began tumbling down.

But Clements says the current regulations on paper are actually “quite robust.”

“We have rules with respect to virtual currency dealers being money service businesses and having to register with FINTRAC and be subject to reporting requirements relating to anti-money laundering and anti-terrorism financing,” he said.

Several crypto exchange platforms are already registered and regulated by securities administrators. These platforms are subject to risk disclosures, requiring them to be transparent about who their borrowers are, how the deposits are being held, how much in capital reserves they have as well as what kinds of safeguards are being implemented.

However, because of the global reach of the internet, many platforms that are used by Canadians are based outside of Canada and don’t comply with these regulations.

“The biggest challenge in this area … is actually enforcement, because there’s a whole bunch of lending intermediaries that have popped up over the last several years that are accessible by Canadian platforms,” said Clements. “These lending intermediaries aren’t complying.”

Celsius is not registered with any provincial securities regulator in Canada, despite the fact that it received a US$400 million investment from the Quebec pension fund. It had also promised its customers huge returns on their deposits, as much as 18.6 per cent annually. At the same time, it also offered loans for as little as 0.1 per cent interest annually.

Clements says charging deposits a high interest rate while offering low-interest loans is “the opposite of what a bank does”

And so there’s a lot of people including myself, who have long been skeptical of how these returns are generated, what risks do these lenders take on,” he said.

Reuters reported on Thursday that in the U.S., regulators in five states have announced that they’re opening investigations into Celsius. Celsius told its clients on Wednesday that it is “attempting to stabilize our liquidity and operations.”

WHAT CRYPTO INVESTORS NEED TO KNOW

Experts agree that anyone choosing to jump into the cryptocurrency market need to understand the high-risk nature of these investments.

“Like any asset that’s jumping around in price, people see an opportunity for quick gains,” said Rogers. “Our concern is they may not understand the risks. They may not even understand that it’s not a regulated area.”

This risk factor also applies to algorithmic stablecoins, as the TerraUSD crash demonstrates.

“You need to be prepared for the volatility, like all risk assets, and you need to be very cautious when promoters of certain acid crypto assets are making claims about their stability or making claims about their guaranteed yields,” Clements.

With files from Reuters.

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What every Canadian investor needs to know today – The Globe and Mail

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Equities

Major indexes on both sides of the border fell at Tuesday’s open as recession concerns continue to weigh on global sentiment.

Shortly after the opening bell, the Toronto Stock Exchange’s S&P/TSX composite index was down 239.36 points, or 1.26 per cent, at 18,789.5.

In the U.S., the Dow Jones Industrial Average fell 194.14 points, or 0.62 per cent, at the open to 30,903.12.

The S&P 500 opened lower by 32.72 points, or 0.86 per cent, at 3,792.61, while the Nasdaq Composite dropped 163.66 points, or 1.47 per cent, to 10,964.18 at the opening bell.

“Volatility remains elevated across every asset class to be sure, although a U.S. holiday [on Monday] meant a 12-hour break from the noise,” OANDA senior analyst Jeffrey Halley said.

“What is clear is that the strategy of watching the rooster fight from the sidelines instead of getting involved remains the sensible one,” he said. “The financial markets continue to tie themselves in knots so complicated, that they would give even the saltiest mariner a headache, as they try to price in a recession no recession and its impact on asset prices.”

In the U.S. traders are now looking ahead to the release of the minutes from the latest Federal Reserve on Wednesday and fresh jobs numbers on Friday. Canadian investors also get employment figures Friday morning.

The Globe’s Mark Rendell reports that Canadian consumers and businesses expect inflation to remain high for several years, adding pressure on the Bank of Canada to announce another oversized interest rate increase next week to prevent rapid consumer price growth from becoming entrenched. The central bank released its business outlook and consumer expectations surveys on Monday.

Those surveys come ahead of next week’s Bank of Canada policy announcements. Markets are expecting the central bank to hike rates by three-quarters of a percentage point after the Fed made a similar move in its last policy announcement.

On Tuesday, Canadian investors will got May building permit figures from Statistics Canada. The agency said the total value of building permits rose 2.3 per cent. Permits in the non-residential sector jumped 7 per cent while residential permits slid 0.1 per cent.

Later in the morning, the latest home sale figures from the Real Estate Board of Greater Vancouver will be released. Toronto home sales numbers follow on Wednesday.

Overseas, the pan-European STOXX 600 was off 1.83 per cent by afternoon. Britain’s FTSE 100 fell 2.40 per cent. Germany’s DAX and France’s CAC 40 lost 2.49 per cent and 2.41 per cent, respectively.

In Asia, Japan’s Nikkei gained 1.03 per cent. Hong Kong’s Hang Seng edged up 0.10 per cent.

Commodities

Crude prices struggled in early going as recession concerns continue to weigh on sentiment.

The day range on Brent is US$112.82 to US$114.75. The range on West Texas Intermediate is US$107.25 to US$111.45.

“Although oil is trading supported on the day due to improved risk sentiment and the possible easing of U.S. trade tariffs against China, oil is still struggling to break out from its current recessionary malaise as the market pivots away from inflation to economic despair,” Stephen Innes, managing director with SPI Asset Management, said.

Meanwhile, Norwegian offshore workers began a strike Tuesday that will reduce oil and gas output.

Reuters reports that Norwegian producer Equinor has said the strike is expected to reduce oil and gas output by 89,000 barrels of oil equivalent per day (boepd), of which gas output makes up 27,500 boepd.

In other commodities, gold prices slipped, hit by an elevated U.S. dollar.

Spot gold was down 0.2 per cent at US$1,805.20 per ounce early Tuesday morning, while U.S. gold futures gained 0.4 per cent to US$1,807.80.

Currencies

The Canadian dollar was lower alongside weaker risk sentiment in the broader markets while its U.S. counterpart touched a fresh two-decade high against a group of world currencies.

The day range on the loonie is 77.37 US cents to 77.97 US cents.

“The hawkish BoC remains an important tailwind for the CAD alongside an economy that appears more resilient than that of other major advanced countries,” Shaun Osborne, chief FX strategist with Scotiabank, said.

“However, markets may trade cautiously in the days ahead as they look to the release of the Fed’s minutes tomorrow and US ISM, ADP and NFP data later in the week.”

There were no major Canadian economic reports due Tuesday.

On world markets, the U.S. dollar index, which weighs the greenback against a basket of global peers, gained 0.8 per cent to 105.98, a new two-decade high for the currency, according to figures from Reuters.

The euro, meanwhile, fell to a two-decade low against the U.S. dollar amid continued recession concerns.

The euro’s 0.8-per-cent fall on the day took the currency to its weakest since late 2002.

The Australian dollar, meanwhile, was also weaker despite that country’s central bank’s decision to raise rates for the third time in as many months.

The Australian dollar slid 0.09-per-cent lower to US$0.6820, after trading as high as US$0.6895 earlier in the day.

In bonds, the yield on the U.S. 10-year note was down slightly at 2.882 per cent in the predawn period.

More company news

A two-week strike at Canadian National Railway Co. is ending after the union representing 750 signals and communications workers agreed to binding arbitration. Steve Martin, a spokesman for the International Brotherhood of Electrical Workers, said the strike that was launched June 18 will end just after midnight. Employees will return to their roles Wednesday morning, the company said in a news release.

French music streaming platform Deezer failed to attract much investor interest for its Paris market debut seven years after its first flotation was aborted, with its shares dropping sharply in early dealing on Tuesday. Deezer, whose larger rivals include Spotify, was down 27.15% at 0947 GMT at 6.00 euros per share, after opening at 8.50 euros.

British Airways is cancelling more flights scheduled for the summer holiday season, it said on Tuesday, at a time of widespread disruption at airports caused by staff shortages and a surge in travel demand. The airline said it would now reduce its April-October schedule by 11%, having said in May the cuts would amount to 10%.

Economic news

(830 am ET) Canada building permits for May.

(10 am ET) U.S. factory orders for May.

With Reuters and The Canadian Press

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