Central banks around the world have their eyes on Bitcoin because the digital currency could threaten financial stability, the Bank of Canada says.
Bitcoin could pose this threat if it ever became “a significant means of payment and the Bitcoin system remained unstable,” the bank said in a report on digital currencies Tuesday, released as part of its spring review.
“Governments may become concerned about legal security and law enforcement issues associated with Bitcoins. For example, the private nature of bitcoin transactions, bitcoins could easily be used to facilitate criminal transactions and to evade taxes,” it said.
Bitcoins are decentralized, meaning that — unlike traditional currency — they are not created, controlled or regulated by a central body. Because there is no central authority, two people anywhere in the world can transact freely, with no fees and no bank account, instantaneously.
The bank weighed the benefits of the virtual currency system, such as making international online payments cheaper for vendors and users, against the potential drawbacks, including “a substantial risk that some users may try to duplicate or counterfeit them.”
The report’s authors also suggested a number of challenges with owning Bitcoin, such as the extreme volatility in its price, how easy it is to delete or misplace crucial information and highly publicized recent incidents of hacking and other security violations.
“In particular, given that digital currencies such as Bitcoin are not regulated and do not have a centralized issuer, users bear all of the risks themselves and have no legal recourse should they wish to reverse a bitcoin transaction,” it said.
The price of a bitcoin hovered around US$436 on Tuesday, falling from a high of more than US$1,000 last November.
The currency has been hammered in the press and on global exchanges in recent months, amid reports that some of the world’s largest exchanges had been hacked, and the subsequent bankruptcy of Japanese exchange giant Mt.Gox.
Bitcoin was singled out in the federal budget as an “emerging risk” in Canada’s fight against terrorism and money laundering. The government has said it is not recognized as legal tender in Canada but it is taxable as an asset.
Though Bitcoin is the most popular digital currency on the market, the report actually focused on platform-based digital currencies such as Facebook Credits, Amazon Coins and even World of Warcraft Gold.
The report found that those units of payment should be monitored by central banks, but they are unlikely to interfere with mainstream financial systems because they are “limited in functionality” and may not fit the standard definition of currency as (i) a unit of account, (ii) a medium of exchange and (iii) a store of value.