Stephen Poloz puts his signature on newly printed Canadian money. Could he one day also put his digital signature on Bank of Canada e-cash?
The central bank said Thursday it's exploring the "potential merits" of getting into the e-money business amid worries that bitcoin and other unregulated digital currencies could eventually hamper its ability to conduct monetary policy and undermine the financial system.
"E-money and the technology that enables it are circumventing our models of payment and fast creating new efficiencies and new risks," Carolyn Wilkins, the bank's senior deputy governor, said in a speech at Wilfrid Laurier University in Waterloo, Ont. "It affects the risks faced by people who use e-money and it has the potential to affect risks to the Canadian financial system as a whole."
The bank and the federal government have another, more selfish, reason for not wanting virtual currencies to muscle in on the dominance of the Canadian dollar – huge profits.
The Bank of Canada remits a surplus of roughly $1-billion a year to Ottawa on the proceeds of printing money – so-called seigniorage. Those operations also pay for running the central bank.
The bank is closely monitoring the rapidly emerging world of virtual cash – both as a rival to its monetary authority and as a threat to the payments system, Ms. Wilkins said.
And new regulation may be coming.
The bank has recently taken on "increased responsibility" to oversee systemically important payment systems, with an eye to determining if new regulation of e-money may be needed, according to Ms. Wilkins. She said the move follows an ongoing federal government review of payment systems in Canada.
"The Bank of Canada is watching developments closely," she said.
Ms. Wilkins insisted that virtual currencies don't yet pose a "material risk to financial stability in Canada." But she said the industry is growing by "leaps and bounds" since bitcoin – an independent digital currency in which transactions are verified by a network of computer owners – was introduced in 2009.
Experts say it's only natural that the central bank would ponder issuing its own digital currency as the world moves increasingly cashless.
"Central banks will have to respond if virtual currencies become a significant force," said Ian Pollick, senior fixed income strategist at RBC Dominion Securities. "It's prudent and diligent to plan."
University of Toronto economist Angelo Melino, a member of the C.D. Howe Institute's Monetary Policy Council, said issuing a digital currency may not be "high on the list of priorities" for the bank. But he said the bank is keeping an "open mind," as it ponders how it might do business and conduct monetary policy in a world where people no longer use cash. "Thinking about it in theory, and actually doing something are quite different," he said.
Bitcoin and other forms of e-money, such as PayPal balances or "stored value" credit cards, pose two main systemic challenges for central bankers, Ms. Wilkins explained. With a significant share of transactions, they could impair the bank's ability to influence the economy via interest rates and cause a crash in the payment system.
"We are nowhere near this point today," she said. "But if we were, it would be even more important to determine whether issuing e-money is a role that should be done by the central bank."
The bank worries that the failure of one type of virtual currency could cause a crash in the payment system, leaving taxpayers on the hook.
"The Bank of Canada sees risks to the economy in a structure that would allow the benefits of money issuance to accrue to the private sector while any losses would be borne by the government and taxpayers."
There were 70,000 bitcoin transactions per day around the world in 2013. That compares with 21 million debit and credit card transactions every day in Canada, she said.
Virtual currencies also pose significant risk for consumers and investors. Ms. Wilkins said their value can fluctuate wildly, there's no guarantee they can be redeemed and they can't be validated by a trusted third party. Users could also wind up with a big tax bill because Canada Revenue Agency considers digital currency an investment, like any other commodity,and therefore taxable, Ms. Wilkins said.