Recent developments have once again thrust the volatile cryptocurrency market into the international spotlight.
In recent days, Russia has raised concerns that the country is relying on cryptocurrencies to trade with international partners, avoiding international sanctions following the invasion of Ukraine. This week, amid the growing popularity of digital currency, US President Joe Biden directed his government to assess the risks and opportunities of creating a central bank digital dollar.
Alfred Lehar, an associate professor of finance at UCalgary’s Haskayne School of Business, is one of many UCalgary scholars across all academic disciplines studying emerging trends in the rapidly changing financial technology sector.
Cryptocurrency is a type of decentralized currency that uses digital ledgers to record transactions and digital signatures to provide transaction security. Cryptocurrency can be valuable on its own as a form of investment, or used to buy and sell services on the market, or used to record ownership of assets.
Dr. Lehar, PhD, is one of five UCalgary researchers in the areas of data security, privacy, and financial technology who entered a Bank of Canada research competition proposing what might look like a regulated North American digital currency ecosystem. Meanwhile, UCalgary students learn about research at the frontiers of the emerging field as they prepare for the job market.
Lehar spoke with UToday about the growing popularity of the cryptocurrency market, the importance of Russian stocks and US changes, and what they mean for the average Canadian investor.
Attraction of competitive advantages
Q: How popular is cryptocurrency in Canada and what is behind its growth?
A: There is no hard data on how many people use crypto, but it is popular because it represents a new class of investment opportunity with high potential returns and opportunities for diversification. Some people just want to try new technology and gain experience.
Q: What current opportunities and challenges does cryptocurrency pose for individual investors? For governments?
A: Cryptocurrencies offer a glimpse of new technologies that will make finances and payments for everyday things more efficient. For example, using cryptocurrency, one could make a payment for a house subject to the deed being transferred, thereby avoiding the need for lawyers who hold funds in escrow. Another example is that a mortgage can be linked to fire insurance and the bank can reduce its risk by having cryptographic proof that the borrower has fire insurance. Farmers can automatically receive crop insurance payments based on the amount of rainfall. Governments realize that these efficiencies will be a competitive advantage for their economies and will have real benefits for citizens. Most governments are therefore working on issuing their own cryptocurrencies, the Central Bank Digital Currencies (CBDC).
Costs and risks
Q: What are the environmental costs of producing cryptocurrency?
A: It is estimated that the Bitcoin network consumes as much electricity as Belgium. Most current blockchains use a proof-of-work algorithm to confirm their security; this calculation process requires “miners” to solve a difficult puzzle that consumes a lot of electricity. A new technology called “proof of stake” will solve this problem soon and decrease energy consumption by 99.9% so that cryptocurrencies are no longer an environmental problem.
Q: OK, recently we saw in the news that Russia may be using crypto markets to evade sanctions imposed by Western countries following the country’s military invasion of Ukraine. Is this happening?
A: Bitcoin is a potential channel to circumvent sanctions for totalitarian governments. However, there may be 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 possibilities to circumvent them. This could be in crypto or government-issued fiat currency.
American movements and impacts
Q: US President Biden signed an executive order on March 9, urging the Federal Reserve to create its own digital currency. Can you explain how this decision by regulators in the United States is influenced by the situation in Russia?
A: I don’t think it’s driven by Russia. China has already conducted large-scale testing of its own CBDC, and many other countries around the world are following suit. With a tough attitude towards crypto, the US would lose its technological edge and risk falling behind. Cryptography is a reality and governments should embrace this new technology and realize the efficiencies for their economy. Canada has been considering creating its own digital currency for some time and it is good that the United States 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 United States recognizes the good aspects of this new technology. Many participants in the crypto space want to be regulated and appreciate government involvement in this space.
Q: What do you think Canadian cryptocurrency investors should pay particular attention to through all these changes?
A: Although it is not clear that specific cryptocurrencies will still exist in 10 years, it is clear that this technology will have a huge impact on all businesses and individuals in the future. Everyone should at least play with this new technology and discover its potential. It is important to gain experience with this technology early to be ready for the future. Businesses that don’t engage in this space could be 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 stock exchanges and banks and change the way users trade assets and borrow funds. We also look at the issues with blockchain technologies. Settlement in traditional financial markets is carried out by impartial entities regulated by the government. Competing private settlers in blockchain systems will put their own benefits ahead of those of users and will be incentivized 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 education, we have had a course on fintech for three years and will expand our offer next year with a course on decentralized finance (DeFi). In our DeFi lab, I work with a small number of undergraduate and graduate students on cutting-edge research questions, allowing students to learn the latest technologies. One of my former BCom students is now a research manager at a global blockchain analytics company.