Bitcoin could pose risks to overall financial stability, says Bank of Canada

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Decentralized digital currencies such as Bitcoin could pose risks to overall financial stability, says the Bank of Canada in a section of their spring 2014 review released Tuesday.

There could be potential risks to overall financial stability if Bitcoin were to become a “significant means of payment” and if the “Bitcoin system remained unstable,” according to the Bank of Canada. “Central banks are studying and closely monitoring decentralized digital currencies such as Bitcoin.”

“Bitcoin users face a number of challenges, particularly the extreme volatility of the price of bitcoins. As well, it is relatively easy to delete or misplace personal holdings of bitcoins. There have also been a number of security incidents that have compromised either Bitcoin accounts or some other part of the Bitcoin infrastructure (such as Bitcoin exchanges),” says the review.

According to the Bank of Canada, using Bitcoin is risky due to lack of regulation and lack of a centralized issuer.

“Users bear all of the risks themselves and have no legal recourse should they wish to reverse a bitcoin transaction.”

The brief section on Bitcoin mentions that governments may be concerned with certain security and law-enforcement issues as well, such as how the private nature of Bitcoin transactions could facilitate criminal transactions and be used to evade taxes.

Two specific “potential” benefits of using Bitcoin are also mentioned: lower transactional costs to online merchants (since there is no third-party intermediary as with credit cards) and lower costs of international remittances. The review does mention how the blockchain technology prevents bitcoins from being counterfeited.

However, the digital currency section of the review largely focuses on “platform-based currencies” such as Facebook Credits or Amazon Coins, weighing the pros and cons of large scale implementation of a centralized digital currency.

According to the bank, “Platform-based digital currencies are characterized by two main features: (i) the platform maintains control over the design and supply of the currency, and (ii) the platform introduces its currency for objectives other than payment services.”

They then clarify that Facebook Credits and the like may not actually meet the definition of a currency due to their limited functionality and transferability among users.

The digital currency section is concluded with the following statement:

“For the most part, digital currencies issued by proprietary Internet platforms are unlikely to affect existing national payment systems in any significant way. Platforms introduce their currencies to enhance their business model and increase their profits. In most cases, this objective requires limiting the functionality of the platform’s currency, which will prevent it from becoming a widely accepted means of payment.”

Coinbuzz

CoinBuzz provides news and analysis on Bitcoin and other digital currencies. Founded in 2014, the site has quickly become a leading source of information on digital currency technologies, businesses, markets, and regulation.

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