May 4, 2023

Understanding Cryptocurrency

How New Technologies Stack Up Against Traditional Banks

In 2009, Satoshi Nakamoto issued a white paper outlining the idea behind Bitcoin. Since then, cryptocurrencies have exploded in popularity, use, and value. There are currently between 5,000 and 8,000 different cryptocurrencies with a combined market cap of $1.5 trillion. While most of these are small and relatively unknown, the two most popular, Bitcoin and Ether, are combined to be worth nearly $1 trillion.

As with any new technology, cryptocurrencies offer a wide range of advantages and disadvantages. Institutional and retail investors alike should be aware of the potential risks that come with buying and selling the digital coins, while their future as a true currency remains uncertain without widespread adoption.

Proponents of cryptocurrencies see them as the future of financial services. Those who are more skeptical view them as a risky and speculative investment. This article will compare the benefits of cryptocurrencies against the advantages of banks and other traditional financial institutions.

Decentralized and Not Controlled by Any Single Entity

To understand how cryptocurrencies work, it helps to compare them against traditional fiat currencies such as the US Dollar, British Pound, or Japanese Yen. These currencies are all issued and managed by central banks who implement monetary policies with the goals of, among many others, managing inflation, encouraging spending or saving, and stabilizing the macroeconomic environment against shocks and volatility.

Cryptocurrencies, by contrast, do not have any central authority or governing body. They are at once controlled by everyone and no one. Thousands of individual computers operate on a decentralized, distributed, peer-to-peer network. Together, they process, verify, and facilitate transactions, which are then recorded on the blockch ain. The blockchain can be thought of as a permanent and distributed ledger of every transaction that has ever taken place.

This decentralized approach means that cryptocurrencies are free of government policies, central banks, or other authorities. No single entity can influence the entire network, and no one can prevent you from transferring coins, accessing the network, or viewing the public record.

Permanent, Transparent, and Secure Records

Cryptocurrencies and the underlying blockchain technology are extremely effective at validating, authorizing, and recording transactions. Each user has a private and pub lic key. The private key provides access to the account, while the public key can be shared with anyone to send and receive funds. These are then used to verify the authenticity and integrity of transactions.

Computers are tasked with solving complex mathematical problems to verify the transaction and add it as a block to the existing chain. Participants in the network must ag ree that a transaction is legitimate and reach a consensus before it is confirmed and added. In public blockchains, like those used for Bitcoin, these records are publicly available. User information is kept private through unique IDs, though it’s important to note that these IDs are not truly anonymous and can be lin ked back to individuals with enough effort.

Once written, these records cannot be falsified, removed, or otherwise changed, and because there is no single point of failure, it is nearly impossible for hackers or other malicious actors to take control of the network.

Simplified International Trade and Money Transfers

An emerging and potentially exciting application for cryptocurrencies is their use in facilitating international trade, money transfers, and remittances. The global remittance market was valued at over $682 billion in 2018, and many crypto companies are exploring how to facilitate low-cost, convenient, and secure transfers without the need for banks or middlemen.

Access to international transfers is especially useful for individuals that rely on remittances or have historically had limited access to financial services. Cubans, for example, have started to embrace cryptocurrency to make purchases or investments online while avoiding US sanctions. Similarly, one remittance provider has transacted $235 million worth of Bitcoin across 5 countries in Africa. Though this remains a tiny sliver of the overall market, there are promising signs that crypto could be an alternative to traditional financial services.

Beyond individual use, companies have started to use cryptocurrencies for international trade. Bitcoin provides a common global currency that allows users to avoid the complexity, fees, and delays that come with moving money abroad. A typical wire transfer can take up to five days to complete, while most Bitcoin transactions can be completed in under an hour. Companies also gain a layer of protection against fraud or failed payments and a permanent, accurate record of every transaction.

Advantages of Traditional Banking Institutions

Generally Lower Risk and Volatility

Bitcoin and other cryptocurrencies have made headlines for massive price swings that can lead to billions of dollars in gains or losses. Since being valued at $1 in 2011, the price of a single Bitcoin surged to more than $20,000 USD in 2017 before crashing back to hover around $3,000 USD later that year. It rallied again in 2020 to an all-time high of $60,000 before falling back to around $40,000 today.

High risk can mean high reward, but this volatility should cause investors to think carefully about how much they are willing to lose. Small-scale retail investors are especially vulnerable to getting caught up in the hype on the way up, only to lose out when it falls again. Likewise, institutional investors have been hesitant to add such extreme volatility to their portfolios.

A recent Deutsche Bank report predicts that Bitcoin and other currencies will remain “ultra-volatile” due to limited tradability and the outsized impact of a few large investors. Others see volatility as a natural part of the price-discovery process, predicting that the price will stabilize as the market matures.

Of course, stocks, bonds, and other assets are all subject to risk and volatility, but investors typically have more information available to them and can protect against these risks through diversification. When investing in stocks, for example, investors can review public financial information in addition to technical indicators and price signals to predict the company’s strategy, performance, and future growth.

Stronger Consumer Protections and Recourse

A lack of a centralized authority may be an advantage, but it can also result in some important limitations compared to traditional banks. Banks and brokerages must have insurance to protect consumers in case of bankruptcy. Likewise, credit cards must protect against fraudulent transactions or unauthorized activity, and they are empowered to reverse charges and return funds. Similar institutions and regulations do not exist for cryptocurrencies.

This was highlighted in the 2014 bankruptcy of Mt. Gox. The crypto exchange handled more than 80 percent of global Bitcoin transactions before it was discovered that 850,000 coins had been stolen. At today’s price, this loss would be valued at more than $34 billion. Coin owners had little recourse, though Mt. Gox recently offered creditors up to 90 percent of their remaining coin as reimbursement.

Finally, crypto users are solely responsible for their access to accounts. There is no “forgot password” option, and this has led to some users losing out on millions of dollars worth of coins. All told, an estimated 20 percent of all Bitcoins ever mined, about $140 billion, are thought to be lost or locked in inaccessible wallets.

Easier to Use for Everyday Payments

The biggest advantage of traditional financial services is that they are far easier to use for day-to-day activities. Cash is nearly universally accepted, while the majority of North Americans have access to personal credit and debit cards. With widespread adoption and existing infrastructure, it’s simply more convenient for most people to use.

The previously mentioned volatility also reduces the viability of cryptocurrencies for everyday payments. The rise in price has meant that a cup of coffee purchased with Bitcoin in 2017 would be worth hundreds or thousands of dollars today. Many companies that do accept crypto payments convert to traditional currencies as soon as possible to protect against losses.

Finally, the IRS has classified cr yptocurrencies as assets, meaning that users are subject to capital gains and must report the value of the currency at the time of payment. Payment apps help to manage this, but the added layer of complexity is yet another barrier to widespread use.

A 2020 report found that only 1 percent of Bitcoin transactions in the US were used to purchase goods or services. There remains a long way to go before cryptocurrencies can seriously compete against the $3.7 trillion spent on credit cards in 2018.

Long-Term Fate of Cryptocurrencies Remains Uncertain

Cryptocurrencies have taken the world by storm since they were first introduced just over a decade ago. But their future remains uncertain, and whether they can overcome the barriers to widespread use and adoption is not yet guaranteed. While some see them as the future of banking, others will find that existing financial services, currencies, and institutions work well enough for most things. Regardless, it is likely that new applications and use cases for cryptocurrencies will continue to emerge, and it will be fascinating to see how this exciting technology evolves and adapts over the coming years.

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Is Canada Really in a Recession?

23 Dec, 2023

Context A CBC News article discussed the possibility of the Canadian economy heading into a recession, or whether the country has already passed that threshold. The article discussed this possibility based on slowed growth, high inflation, and the Bank of Canada’s continued interest rate hikes. Analysis A recession is a significant reduction in economic activity that occurs over a length of time, usually months or years. One of the most accepted definitions of a recession comes from the economist Julius Shiskin in 1974, who identified the threshold to an economic recession as two consecutive quarters of declining GDP, although economists often argue about the comprehensiveness of this measure. The causes of a recession can be quite complicated and have many contributing factors. Some common examples include a sudden economic shock such as the recent COVID-19 pandemic, excessive debt, asset bubbles, inflation, deflation, or large technological changes. One major factor influencing the probability of an economic recession includes rising interest rates from the Bank of Canada, which has implemented the highest hike in the shortest amount of time in all of the bank’s history, raising the rate over eight times since 2022. The Bank of Canada increased interest rates in order to curb inflation since rising interest rates discourage taking on debt and spending. This further encourages companies to lower prices or slow inflation to increase demand. Currently, the Bank of Canada is keeping at the 5.0 percent rate but has said that further hikes are not off the table as inflation may continue to exceed acceptable rates. Increases in interest rates can certainly contribute to or precede a recession. In fact, the Bank of Canada has raised interest rates three times to slow inflation since the 1960s and all three times this action led to an economic recession. Current fears of a looming economic depression are also not unique to Canada, as following the COVID-19 pandemic, the global inflation rate increased to 8.73 percent in 2021. This was due to supply chain issues, as well as the effect of the Russia-Ukraine War creating rising food and energy prices, as well as general fiscal instability. A majority of the World Economic Forum’s lead economists agreed earlier this year that we could see the beginning of a global recession starting in 2023, which would certainly affect the Canadian economy. The article also discusses the Canadian economy’s slowed economic growth, as the GDP has stagnated in the second quarter of this year. However, it suggests other factors may explain the decrease, including striking port workers in British Columbia, and the resulting negative effect on economic activity. An RBC report mentions how on a per-person GDP basis, there has already been a decline for four straight quarters despite a surge in population growth, and concludes overall predictions for GDP growth do not look promising despite local factors including Canadian wildfires and strikes. They also point to a 0.5 percent increase in the unemployment rate over the past few months, which has historically tended to indicate a looming recession.

Ottawa Mayor and Lansdowne Park

21 Dec, 2023

Context The City of Ottawa Mayor, Mark Sutcliff released a statement about a revised plan for the redevelopment of Lansdowne, an urban public park containing historic landmarks and commercial venues. The project includes the demolition of a sports arena complex, stadium stands, and the building of a new event center, residential units, and retail space. Despite suggesting the new plan has addressed the concerns of residents, many issues remain. Analysis The City of Ottawa and the Ottawa Sports and Entertainment Group (OSEG) have been in partnership to develop Lansdowne since 2012 and finished an original redevelopment of the park back in 2014. A few years later in 2019, the financial sustainability of the park came to the city council’s attention, and in 2020 the partnership was extended another 10 years with direction to develop a new plan to revitalize Lansdowne. Consultation with community members started in 2020, with the original concept released last year in 2022, and a revised version released this month. Community feedback was acquired through various platforms including public information sessions, an open email for feedback, and public surveys. A summary report of that feedback was published on October 6th, which highlighted the six most common themes of community residents’ concerns. The first concern was related to the size and number of the multiple high-rise apartments which were designed to exceed 30 floors. In the new plan , they have removed one of the three planned buildings, with fewer total units in each, and only one tower with the potential to be built at 40 stories. Residents were also concerned about the loss of greenspace due to the new event center construction. Many people suggested they wanted that greenspace allocated elsewhere, or alternatively, an accessible greenspace roof on the event center. Although in the original plan the city had conceptualized a greenspace rooftop on the event center, this was scrapped in the new plan as it was deemed too expensive to maintain. Respondents wanted a restriction of vehicles to the premises to promote pedestrian safety, a concern that has existed since Lansdowne was first renovated back in 2014. They also wanted more public transportation infrastructure to and from the park, whether that is the local city buses, trains, or cycling infrastructure to reduce congestion on connecting roads. Relatedly, residents also desired more accessible public use space from washrooms to water fountains to usable and free space for people to occupy. The new plan has reduced the number of parking spaces for the residential buildings to meet the Bylaw limit of 0.4 spaces per unit, down from 739 to 336 spaces, while they added 36 new spaces for the event center. In terms of accessible public space, the new plan includes 27,000 square feet of space originally earmarked for the third residential building, now available for an unspecified “public realm.” Residents also wanted more local and less corporate or big-box businesses, to reflect the unique local community better. The new plan does suggest the amount of retail space has been reduced from 108,000 square feet to 49,000 square feet but does not directly address the desire to attract smaller, local businesses. Finally, there was also a concern about financial transparency of how the project is being funded and the resulting impact on the City. The Federation of Citizens Association (FCA) which represents over 70 community groups voted unanimously to oppose the new plan, which comes with a very costly price tag of $419 million, increased from $332 million of the first plan. They cite that the debt comes at a time when the transit system is facing major issues, and the city is struggling with a housing affordability crisis.

Danielle Smith - Conflict of Interest

20 Dec, 2023

Context Newly elected Premier of Alberta Danielle Smith has defended her cabinet which is coming under fire over conflict-of-interest concerns. Environment and Protected Areas Minister Rebecca Schulz’s husband, Cole Schulz , may be lobbying the government in the areas that the Minister works in. Cole Schulz's firm is working on removing the protection of a threatened caribou range to make room for the oil and gas industry – which has raised concerns over who has Minister Schulz’s ear. Analysis The company that Cole Schulz is a partner with, Garrison Strategies, was hired by the Explorers and Producers Association of Canada and is working to influence the government on the issuing of reclamation certificates for oil and gas sites. The lobbyists are working to gain more access to protected caribou habitats to expand the oil and gas industry. They are hoping to “ address the moratorium on tenure in caribou regions ” which would effectively give them better access to land and investments. The Little Smoky and A La Peche herds in northwest Alberta were protected by a moratorium in 2013 which stopped the granting of new energy leases in this area. At the time, 95 percent of the herd’s range was heavily damaged. Phillip Meintzer of the Alberta Wilderness Association found that though records show that Garrison didn’t contact Environment and Protected Areas directly, the firm’s causes are “ too close for comfort ”. Meintzer also notes that as Garrison works on opening the protected caribou land for Alberta Energy, Environment and Protected Areas should be working on a protection plan for the federally and provincially designated threatened animal . Minister Schulz is working closely with the ethics commissioner, however, Danielle Smith confirmed that “ the ethics commissioner has looked at it, given guidance and there’s no violation [of the Conflicts of Interest Act]”. Cole Schulz also indicated that his firm wasn’t aware that Minister Schulz breached the Act at any time. Meintzer suggests that this situation “ calls for a further look ” from a third party. Sources https://globalnews.ca/news/9988998/alberta-premier-danielle-smith-rebecca-schulz/