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Financial System Review—2022 – Bank of Canada

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Ownership of cryptoassets is also broadening, primarily as a speculative investment rather than a method of payment. In 2021, about 13% of Canadians owned Bitcoin, up from 5% in 2020. The median holding of Bitcoin was about $500, mostly for investment purposes. To date, the significant volatility in the prices of these unbacked cryptoassets as well as high transaction costs have been key obstacles to their wide acceptance by merchants as a method of payment. For example, prices of cryptoassets such as Bitcoin and Ether were generally four to five times more volatile throughout 2021 than the S&P 500 stock market index was. Sudden price corrections mean that investors who hold these types of cryptoassets can be exposed to significant financial losses.

Interconnections between unbacked cryptoasset markets and the financial system appear limited but are expanding rapidly. Institutional participation in these markets has grown in recent years. However, estimating the growth of institutional investments in these assets and related infrastructure is difficult due to the lack of readily available and consistent data on the exposures of financial system participants to these markets. Discussions with industry participants suggest that portfolio exposures remain small. Cryptoassets have generally become more accessible to investors in recent years through the emergence of closed-end funds, crypto exchange-traded funds and listed companies dealing in or mining cryptoassets. Moreover, hedge funds and some large pension funds are reportedly investing more in cryptoasset platforms. Cryptoassets are also becoming more integrated into the traditional financial system (often referred to as the financialization of cryptoassets), including through the development of crypto derivatives markets and as investment assets or collateral for loans.

The Bank’s assessment that these markets are not yet of systemic importance is reinforced by the fact that the major sell-off in cryptoasset markets in May 2022 was broadly inconsequential for the traditional financial system in Canada and abroad.

Stablecoins aim to meet the demand for a more liquid and less volatile cryptoasset. Stablecoins play a key role in decentralized finance, a suite of alternative financial products offered in cryptoasset markets that mimic traditional financial services (e.g., loans, insurance, asset management and custody). Like other cryptoassets, stablecoins can also pose risks to financial stability if adopted on a significant scale without appropriate regulatory safeguards, particularly regarding the ability of issuers to respect redemptions (Box 5).

The lack of adequate regulatory frameworks for cryptoassets is a key factor behind this vulnerability. Firms operating in cryptoasset markets often perform functions similar to those of traditional financial institutions. They share many risks but are not subject to the same regulatory standards. Until this regulatory gap is addressed, investors in and end users of unbacked cryptoassets are subject to heightened risk of financial losses from events such as fraud, cyber attacks or the failure of a key custodian or service provider. Moreover, a significant challenge to the regulation of cryptoassets is that they are easily used for transactions across borders. This can be positive for economic activities such as remittances, but it creates opportunities for illegal transactions such as money laundering and terrorist financing. For the regulation of these markets to be effective, countries will have to coordinate closely to ensure consistency and prevent criminals from exploiting regulatory gaps.

The regulatory response is taking form but needs to gather momentum. Regulators globally have recognized the risks posed by deficient regulatory frameworks and are working to address them. For instance, in March 2022 the US administration released an expansive executive order:

  • launching a strategy on digital assets
  • requesting many federal government agencies to jointly examine the regulation of digital assets

In Canada, provincial securities administrators have issued guidance for the regulation of cryptoassets and cryptoasset trading platforms that meet the definition of securities or securities market infrastructure, respectively. The federal government announced in its 2022 budget that it would conduct a legislative review of the financial sector. The first phase of this review will focus on digital currencies, including cryptoassets and stablecoins. As part of that work, the government will examine:

  • regulatory approaches to maintaining the security and stability of the financial system as digital currencies become more common
  • the potential need for a central bank digital currency in Canada

In addition, a Bank of Canada official currently chairs the FSB Regulatory Issues of Stablecoins working group that is collaborating to promote globally coordinated regulatory responses to stablecoins.

More generally, federal and provincial authorities should move quickly to develop an integrated regulatory regime for cryptoassets, otherwise this vulnerability could continue to worsen.

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Is Canada heading for a recession? – CBC News

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$65 oil on the horizon if a recession hits, Citi warns – CNBC Television

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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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