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Based on a series of surveys, central bank researchers found that around 5 per cent of Canadians owned bitcoin between 2018 and 2020.Andrew Vaughan/The Canadian Press

Canadian bitcoin owners tend to have low levels of financial literacy while being exposed to elevated levels of financial risk, according to new Bank of Canada research.

Based on a series of surveys, central bank researchers found that around 5 per cent of Canadians owned bitcoin between 2018 and 2020. That ownership was “concentrated among young, educated men with high household income and low financial literacy,” the researchers said in a paper summing up the survey results released this week.

The researchers found that bitcoin owners tend to have a greater knowledge of how bitcoin technology works than non-owners, but score lower on general financial knowledge questions. At the same time, “Canadians who are financially literate are more likely to be aware of bitcoin [than the average Canadian] but less likely to own it,” the researchers said.

The surveys, conducted annually between 2016 and 2020, highlight the risk of investing in the volatile and sparsely regulated asset class. Around half of the current or past bitcoin owners who responded to the surveys reported being affected by negative events, such as a price crash, scam or data breach.

The Bank of Canada has been tracking the adoption of cryptocurrencies since 2016 to see how they are being used and whether they represent a challenge to the existing money and payments system. So far, cryptocurrency ownership remains relatively limited in Canada, and most people treat it as an investment rather than as a means of payment.

Around 15 per cent of bitcoin owners who responded to 2019 survey said their main reason for owning the asset was for making payments.

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The last survey included in the research paper was conducted in November, 2020, which means that the research misses the run-up in cryptocurrency prices at the end of 2020 and into 2021. It also does not account for recent regulatory changes, such as the approval of cryptocurrency exchange-traded funds in 2021, which may have broadened ownership.

A pair of surveys conducted by KPMG in 2021 and early 2022 found higher levels of cryptocurrency adoption, including among institutional investors. Thirty-two per cent of the respondents to an institutional investor survey said they had some exposure to crypto assets, while 13 per cent of respondents to a separate retail investor survey said they had bought crypto assets.

The Bank of Canada’s research suggests crypto investors need to be aware of the risks that accompany the asset class. Eighteen per cent of the current or past bitcoin owners surveyed by the bank said they had experienced a price crash, 14 per cent said they had lost access to their digital wallets, and 12 per cent said they had participated in an initial coin offering that ended up being a scam.

The volatility of cryptocurrency prices alongside the history of fraud in the sector – most notably the collapse of Canada’s QuadrigaCX crypto exchange – has raised some financial stability concerns.

In its most recent financial stability report, published last May, the Bank of Canada said that “these markets are not of systemic importance in Canada, neither as an asset class nor as a payment instrument.

“But this could change if a large technology firm – a so-called Big Tech – with a sizable user base decided to issue a cryptocurrency that became widely accepted as a means of payment,” the bank said.

The Bank of Canada is developing a prototype for its own central bank digital currency (CBDC) – a kind of digital cash usable for online payments. The federal government has yet to green-light the launch of a CBDC, but the central bank is working on plans in case the government gives it the go-ahead.

There are two main reasons why central banks may want to develop their own CBDC: a collapse in physical cash use or widespread adoption of cryptocurrencies or other private digital assets, both of which could undercut the central banks’ position at the heart of the payments system and its ability to conduct monetary policy. So far neither has happened.

The federal government’s 2022 budget announced plans for a review of financial sector legislation that will look at cryptocurrencies and other digital assets.

Cryptocurrencies have become a hot political topic in recent months, with Conservative Party leadership contender Pierre Poilievre touting bitcoin and promising to make Canada the “blockchain and crypto capital of the world.”

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