BoC weighs creating new digital currency

Report urges caution, due to uncertainty

CALGARY • The Bank of Canada is considering the merits of establishing a digital currency as interest in cryptocurrencies like bitcoin reaches a fevered pitch.

In a research paper released by the central bank Thursday, report authors Walter Engert and Ben Fung said there are merits to creating a central bank digital currency as society starts to move away from cash, and the bank’s potential to reap profits off issuing that cash could be threatened.

The report said a central bank digital currency (CBDC) could become a cheaper alternative to debit and credit cards and other forms of payment, making it easier for competition to emerge in the retail and large-value payment sectors.

“With no transaction fees charged by the central bank, the benchmark CBDC would probably be less expensive for merchants than cash and credit cards.”

Some of the benefits overlap with those of bitcoin, ether and the myriad of other digital currencies based on cryptography that have emerged, though one of the central benefits of bitcoin and the like is that it is decentralized and not controlled by any bank.

The value of bitcoin, the most well-known cryptocurrency, has skyrocketed.

This year it has risen from about US$1,000 per coin at the start of the year to crest at over US$11,000 per coin this week, before sliding back closer to US$9,000.

The interest has led to many new entrants into the sector and a few stumbles in the rush to get in on the rising valuations.

Toronto-based blockchain investor NextBlock Global said in early November that it had suspended its initial public offering after allegations that it made misleading statements in its marketing materials.

The report Thursday said given the complexity and uncertainty around introducing a central bank digital currency, central banks should proceed cautiously and incrementally.

In March, the bank released a report that said the decentralized technology that supports the digital currencies didn’t yet match the net benefits of the existing centralized system for clearing transactions, and that the added complexity of the proposed system could lead to added complexity and operational risk.

A senior official with the U.S. Federal Reserve urged central banks take a cautious approach to cryptocurrencies.

Randal Quarles, who oversees Wall Street, says central banks are a long way off from embracing cryptocurrencies as a means of paying for things. And with the price of bitcoin gyrating massively he added that it could be dangerous for the financial system. That’s especially true as the digital-currency movement grows larger, Quarles said.

“Without the backing of a central bank asset and institutional support, it is not clear how a private digital currency at the centre of a large-scale payment system would behave, or whether the payment system would be able to function, in times of stress,” Quarles, the Fed’s newly minted vice-chairman for supervision, said in remarks prepared for a Thursday conference at the U.S. Treasury Department.

“Digital currencies are a niche product that sometimes garners large headlines,” he said. “But from the standpoint of analysis, the ‘currency’ or asset at the centre of some of these systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in leading cases, is not the liability of any institution at all.”

Robert J. Shiller, the Yale economist whose work covers the prediction of asset prices — and the inefficiency of markets — also weighed in on bitcoin.

A day after Noble laureate Joseph Stiglitz said bitcoin should be outlawed, Shiller said the attraction of the currency was a narrative akin to a “mystery movie” that draws in people who want to outsmart the system.

“Bitcoin, it’s just absolutely exciting,” Shiller said at a conference in Vilnius, Lithuania on Thursday. “You’re fast. You’re smart. You’ve figured out nobody else understands. You’re with it. And bitcoin has this anti-government, anti-regulation feel. It’s such a wonderful story. If it were only true.”