The Bank of Canada is considering the merits and risks of digital currencies 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 staff discussion paper, which doesn't necessarily reflect the views of the bank, 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.

Story continues below advertisement

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

The report, which discounted some of the other proposed benefits of a digital currency such as reduced criminal activity, said that given the complexity and uncertainty around the currency's potential that central banks should proceed incrementally and cautiously.

The findings echo a bank report in March that looked into the potential of using the decentralized blockchain technology that underpins the digital currencies in clearing financial transactions.

The report said there are potential cost-savings and the system has already advanced from early days, but that the net benefits didn't match those of the existing centralized system, and that the added complexity of the proposed system could lead to increased operational risk.

But while financial institutions continue to strike a cautious note towards cryptocurrencies and the blockchain technology that underpins it, investors are piling in.

The value of Bitcoin, the most well-known cryptocurrency, has surged from about US$1,000 per coin at the start of the year to more than US$11,000 per coin this week, while Ether has gone from under US$10 to over US$400.

This year's frenzy is in part because of the launch of the Ethereum platform in 2015 that allows companies to build applications based on the blockchain, said Alan Wunsche, chair of industry group Blockchain Canada.

Story continues below advertisement

The platform, which uses Ether for transactions, made it easier to create and try new uses of the decentralized system. The system has led to lots of experimentation, including by banks, with some of those showing real potential last year and helping boost valuations this year, Wunsche said.

"There are big visions and big plans for this technology to disrupt our existing financial systems and anything that is really financially oriented."

"In 2017 we're seeing the broader belief now that those experiments that were taking place in 2016 are really going to be fruitful," said Wunsche.

The jump in interest has forced financial institutions and regulators take it serious and try and catch up, said Wunsche, who is also CEO of blockchain start-up TokenFunder.

He said he worked with the Ontario Securities Commission for a year to launch in early November what he said was the only regulatory-compliant token issue in Canada, which blockchain start-ups are using as an alternative to venture capital to raise money.

"The regulators understand that this is disruptive, and they're looking at it."

Story continues below advertisement

Some start-ups have already made stumbles in the rush to get in on the rising valuations, with Toronto-based blockchain investor NextBlock Global suspending its IPO in early November after allegations that it made misleading statements in its marketing materials.