It has been an exciting and turbulent year in the crypto and blockchain industry.
On one hand we’ve seen a dramatic reversal of fortunes as digital currency prices fell off a cliff, and well-known, formerly trusted, centralized exchanges went bust, leaving users and investors in their wake. On the other hand, there has been remarkable development from a technology perspective.
All of this comes at a time when Canada is taking a closer look at the role of digital currencies in a modern economy. The Bank of Canada has called on fintech companies to weigh in on incoming retail payment regulation. Meanwhile, the federal government of Canada has also launched a digital currency consultation as part of its budget.
Understandably, there is heightened interest in these transformative technologies. However, government must strike a balance between establishing safeguards that protect Canadians, while ensuring innovation is allowed to flourish in a sector that is in dire need of it.
Done correctly, Canada has an opportunity to lean into this emerging technology and become a global innovation, jobs and value creation leader. Here are three considerations to secure that outcome.
Crypto as a speculative product vs. blockchain as a fundamental solution
Let’s not throw the baby out with the bathwater and group the fundamental technology of blockchain together with the products built on top of it.
This is an important distinction that policy-makers must understand because conflating cryptocurrencies with blockchain will undoubtedly lead to regulation that will stifle rather than encourage innovation.
Crypto as a speculative product is what has captured mainstream attention. It is the buying, holding and lending of digital currencies like Bitcoin and Ethereum. These digital tokens are treated like investments and there is an entire industry built around facilitating trade, which has also caught the eye of mainstream media e.g. the recent FTX implosion. Here, intermediaries control customer deposits and we’ve seen very loud calls for tough regulation given what seems like clear violations of safety and risk protocols.
Then there is blockchain as a fundamental solution – the focus of Wellfield’s business – which differs entirely from the centralized trading platforms described above. In fact, blockchain as a solution is more often described as decentralized finance (DeFi), which if implemented correctly, gives users unrestricted control of their money and direct access to smart contracts which drive everyday financial solutions.
Blockchain within this context is not just a “product”. At its core, blockchain is a new financial foundation for the world, maintained across computers that are linked in a peer-to-peer network. It is wholly different infrastructure that has the power to drastically alter legacy ecosystems making all transactions faster, cheaper and safer for users.
Blockchain technology for the financial world is akin to the radical transformation that Netflix brought to entertainment. Blockchain is finance’s “streaming moment”, which the technology that Wellfield has developed will help usher in.
This technology has the potential to disrupt a multi-trillion-dollar global financial services market, and regulators must take a measured approach to ensure the excesses that have emerged in the market are contained, while freeing creativity to build solutions that stand a real chance of changing the financial lives of so many around the world.
Create healthy competition to provide better solutions for everyday financial services
Our financial world is controlled by a handful of institutions that aren’t motivated to take risks and compete.
Consider Interac – the backbone of consumer banking. It was designed by banks, for banks and its utility and fee structure are dictated to us.
The lack of competition creates friction elsewhere. Simple money transfers and cross-border transactions are rightly held up as examples of the myriad ways in which multiple parties siphon money from each transaction through an unnecessarily complicated web of banks and other intermediaries. Cross-border payments can take days to complete, and the fees can be as high as 10 per cent of the total transaction. A lot of this inefficiency has to do with multiple layers of counterparty risk management, which can be handled today on public blockchains, flawlessly, nearly instantaneously, and inexpensively.
We see the same overreaching in other areas of banking too. In fact, just keeping a basic checking account open will set you back by monthly and ongoing service fees that are often substantial in proportion to the typical float in these accounts. Plus, the yield is infinitesimal especially in times of high inflation, which means the cost to park your money in a bank account increases on a real basis (and they set the rates!).
Retail payments suffer from the same punitive fees. How often have we heard from the small and medium-sized business (SMBs) community decrying the hefty fees associated with processing transactions for goods and services? Canada is a nation of SMBs which according to the Business Development Bank of Canada contribute 54 per cent of Canada’s gross domestic product. Shouldn’t we find innovative ways of keeping costs down so they can excel?
In all these instances, blockchain technology can vastly improve efficiency, transparency and costs. We should place a premium on good ideas that earn the right to serve Canadians rather than protecting established norms.
Don’t fix what isn’t broken
Let’s recognize that a lot of good work has already taken place so we don’t over engineer solutions to problems that don’t exist.
FINTRAC, the OSC and Bank of Canada have been open-minded and provided clear guidance on how money service businesses or securities legislation applies to the blockchain industry’s operations.
The government also deserves credit for undertaking industry-wide consultation. Creating a forum to hear from a broad range of stakeholders including companies like Wellfield, universities, think-thanks, and industry associations absolutely has merit particularly given how nascent this technology is. But, let’s not force policing its development when appropriate measures already exist.
The exchange and management of money doesn’t need to be the exclusive domain of institutions. That is the true power of digital currencies, blockchain and smart contracts. They are principally about creating equal opportunity for people, supported by coding and peer-to-peer networks that can give Canadians greater sovereignty over their own financial future.