The central bank of Canada has published a new working paper that suggests its researchers believe digital currency exchange rates will become less volatile should adoption increase.

Penned by researchers Wilko Bolt (of the central bank of The Netherlands) and Maarten RC van Oordt (of the Bank of Canada’s Financial Stability Department), the paper offers a possible “economic framework” for exchange rate analysis. Published on 18th August, it further represents the latest work from a major central bank, following growing interest from this segment of the financial community in recent months.

The authors explore factors influencing digital currency exchange rates, which they write include existing demand for payments, the day-to-day moves of market speculators and the belief among some buyers about future mainstream adoption.

Ultimately, they conclude major price swings brought on by traders could subside if digital currencies see broader use for payments.

The authors note:

“Our model predicts that, as a virtual currency becomes more established, the exchange rate will become less sensitive to the impact of shocks to speculators’ beliefs and their inflow into and outflow from the virtual currency market. This prediction undermines the notion that the current high volatility of the exchange rates of virtual currencies will prohibit their widespread usage in the long run.”

Later in the piece, the researchers assert that digital currencies with a “fixed supply” are likely to behave more like commodities than currencies, and that current exchange rates are potentially “a symptom of early development” – one that could potentially go away depending on how usage evolves.

“The future will show how much volatility will drop,” they conclude.

Work continues

The paper represents another step in the Bank of Canada’s work with the technology, which has seen it comment on issues surrounding digital currencies over the past two years while at the same time exploring blockchain applications.

Earlier this summer, the Bank of Canada drew headlines when it unveiled a pilot project for a central bank-issued digital currency – an initiative that mirrors other work being undertaken at institutions like the Bank of England.

The bank has explored the impact of the technology in the past, with one senior official speculating in a speech last November that bitcoin could lead to “a new dynamic in the global monetary order” in which central banks “struggle” to carry out policy initiatives.

The full paper can be found here.

Canadian dollars via Shutterstock