The official website of the government of Canada mentions that ‘digital currencies are not legal tender.’ What follows this statement are ‘risks’ and ‘tips’ surrounding cryptocurrencies. However, some recent developments in the digital currency realm in Canada contradicts the message.
In February 2021, the Ontario Securities Commission green-lit the world’s first bitcoin exchange traded fund (ETF). Now, Canadians can invest in ‘physically settled’ bitcoin instead of derivatives. Barely two months later, three ether ETFs were approved.
In March, crypto mining firm Link Global commissioned a 10-megawatt site in Alberta to mine bitcoin, the world’s most popular cryptocurrency. The company claims to rely on power produced from natural gas for ‘cost-efficient’ mining. Another mining firm, Bitfarms, operates five crypto mining facilities in Quebec. It is now planning a bigger facility in Argentina to cut costs and make operations profitable.
And this is just the tip of the iceberg. Various stakeholders hold interests in cryptocurrencies. But are these stakes held in an economic activity that has utility?
Cryptocurrency And Utility
The term ‘utility’ holds great significance. Had it not been for the utility of products (textile, iron, and chemicals) manufactured during the industrial revolution of the 18th century, the ensuing rise in the standard of modern living would have never occurred.
Utility precedes demand and it is demand that shapes the economy more than anything else. With the agricultural revolution, the world had a surplus of farm products, resulting in a rise in the demand for industrial products. It was followed by the demand for services, including travel and leisure activities. Textbooks extensively cover this aspect to explain how the world moved from agriculture to manufacturing to services and, in due course, made people’s lives better.
But where do cryptocurrencies fit in this scheme of things?
As mentioned earlier, they are not legal tender in Canada or anywhere around the world. In fact, some countries have outlawed any activity in digital currencies. Perhaps, this alone can be the single straw with enough weight to break the camel’s back. What is currency, if not legal tender?
But proponents have their own set of reasons to believe cryptocurrencies are the ‘future.’ Many say these are investment instruments. However, investment instruments like government bonds and company stocks are underpinned by the existence of an entity that operates in a particular sector – be it agriculture, manufacturing, or services. They may even say digital currencies are a store of value ‒ not like fiat currencies, but like precious metals such as gold. But gold, too, is regulated with respect to production and trade. The digital currency realm is largely unregulated, with barely any legal oversight mechanism.
Money is a crucial resource. From Canada to the United States, developed countries are announcing high fiscal deficits as revenues shrink and expenditures, particularly on unemployment benefits and subsidies to small businesses, skyrocket in the wake of the pandemic. It is always surplus money that gets parked into investment instruments. In the absence of cryptocurrencies, any investment would have gone into government bonds, safe havens like gold, or the stocks market.
But today, trillions of dollars are parked in something that lacks utility.
Consumed For Entertainment
Consider this. Even a big budget Hollywood movie has utility; it is consumed for entertainment. From Mars missions to automated cars, every activity, every vision, has some value. It lends sense to pump money into these economic activities. In the absence of utility, dedicating enormous money and human resources to developing and promoting something like crypto is categorically unjustifiable, more so when the world is short on crucial supplies, including semiconductor chips and healthcare facilities.
From cryptocurrency ETFs to mining, each activity involves the deployment of funds and human capital. A high amount of electricity is also consumed to run these operations. Although world leaders have pledged to cut greenhouse gas emissions, coal still has wide usage as fuel to generate power. And when a bitcoin mining company boasts of using electricity produced from natural gas, it doesn’t negate the fact that natural gas is only a ‘relatively’ cleaner fuel and emits a substantial amount of CO2 and methane.
The stance of Canadian stakeholders in the cryptocurrency realm could have been justifiable if it was a period of boom. But the country is exposed to high debt-to-GDP ratio and the Bank of Canada has kept policy rates at a record low to lift the economy out of slowdown. Many critical infrastructures, from green energy projects to childcare, needs funding. At such time, disproportionate deployment of already scarce resources to a field that is yet to prove its utility is not a good idea.
Extremely volatile assets like cryptocurrencies, which tumbled after a couple of tweets by a multi-billionaire CEO and a major economy’s decision to outlaw them, can operate on the periphery. However, pumping too much money into cryptos and making them a mainstream economic activity is questionable.
Kunal Sawhney is the founder and CEO of Kalkine.