The Bank of Canada is “keeping a close eye” on risks posed by new forms of electronic money, according to a new statement released Thursday.

The statement is based on remarks made by the bank’s senior deputy governor Carolyn Wilkins at a university event in Waterloo, Ontario.

During the event Wilkins discussed two different types of electronic money: those denominated in national currencies and backed by their issuer and cryptocurrencies with no issuer, such as bitcoin.

Wilkins noted the potential risks and benefits of digital currencies, concluding that bitcoin remains outside the mainstream and, as such, does not pose a serious threat to Canada’s financial stability.

Adoption too low to threaten stability

The deputy governor pointed out that digital currency technology enables users to circumvent old payments platforms, creating “new efficiencies and new risks” along the way.

“People who use these technologies need to be aware of the risk of putting their trust in an e-money scheme that is lightly regulated with limited or no user protection,” Wilkins told students at Wilfrid Laurier University.

There are about 340 Canadian merchants willing to accept bitcoin, along with an estimated 76,000 merchants in other parts of the world, she said.

“Some merchants may be accepting it, but it has yet to gain much traction with people making purchases. There aren’t a lot of data on this, but what we do have indicate that last year there were around 70,000 bitcoin transactions per day across the globe. This pales in comparison with the more than 21 million debit and credit card transactions that occur each day in Canada alone,” said Wilkins.

She said many people are not interested in bitcoin because it has “serious flaws” when it comes to satisfying the three main characteristics of money – a medium of exchange, a store of value and a unit of account.

Wilkins also pointed out that Canadians still prefer debit cards and cash over digital currencies, adding that emerging digital currencies do not pose a material risk to financial stability in Canada at this time:

“That said, money and payments technology is progressing in leaps and bounds, and so the Bank of Canada is watching developments closely.”

Hypothetical risks

Wilkins warned that there could be ramifications if digital currencies were to gain widespread acceptance, but she described such a scenario as “unlikely”:

“In the unlikely situation in which cryptocurrencies were used broadly, a significant proportion of economic transactions would not be denominated in Canadian dollars. This would reduce the bank’s ability to influence macroeconomic activity through Canadian interest rates.”

The Bank of Canada said digital currencies have the potential to alter the fundamental payments architecture around the world, hence they could pose risks to individuals and the Canadian financial system as a whole. Wilkins said the country was still nowhere near that point.

The bank issued a similar statement in May, saying that digital currencies could destabilise global finance, but only in theory. In a separate statement, the bank said it was not concerned by the advent of digital currencies.

Innovation offers some benefits

Wilkins added that money and payments are “at the core” of central banking. She also confirmed that the Bank of Canada is researching the potential benefits of “issuing e-money”.

“There is little doubt that these innovations have some benefits. They give us more choice about how we make purchases, and can reduce the cost of certain transactions. Think about online purchases of pictures or songs,” she said.

She added that digital currencies could be useful for small transactions, cross-border commerce, remittances and other niches.

“E-money has some benefits in certain economies, especially when cash is not a viable option,” said Wilkins.

However, Wilkins concluded that individuals need to be aware of the risks of using e-money, since it is not subject to oversight and consumer protection standards.

Open-minded approach

Canada has a comparatively liberal regulatory framework and in the past it has taken steps to ensure free development of cryptocurrency businesses.

Earlier this year, the Parliament of Canada passed a bill amending the country’s AML framework, extending it to digital currency businesses. The bill regulates bitcoin business as money services businesses, imposing a number of reporting and record keeping requirements.

The bill gave digital currency businesses ample time to prepare and most Canadian firms in the cryptocurrency space say they expected the changes.

Bank of Canada image via Shutterstock