UPDATE 1-Bank of Canada: Bitcoin needs watching but no threat now

Thu Nov 13, 2014 3:15pm EST
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OTTAWA Nov 13 (Reuters) - The evolution of cryptocurrencies such as bitcoin bears close watching for any threats to the financial system that could arise from more widespread use, although electronic money does not currently pose a risk to stability in Canada, a top Bank of Canada official said on Thursday.

Senior Deputy Governor Carolyn Wilkins outlined the risks that e-currencies can pose to consumers, such as a lack of recourse if money is lost or stolen, or if an exchange fails, as in the high-profile case of Mt. Gox earlier this year.

There could also be ramifications for the central bank if e-money were to gain more widespread acceptance since changes in the benchmark interest rate would have less effect on a system that uses cryptocurrencies alongside the Canadian dollar, Wilkins said.

"In the unlikely situation in which cryptocurrencies were used broadly, a significant proportion of economic transactions would not be denominated in Canadian dollars," Wilkins said in a prepared text to be delivered in Waterloo, Ontario.

"This would reduce the bank's ability to influence macroeconomic activity through Canadian interest rates," she said, adding that the country was nowhere near that point.

As money and payment technologies progress, the Bank of Canada is helping the federal government modernize oversight frameworks, Wilkins said. The central bank is also undertaking research on the merits of issuing e-money.

Cryptocurrencies are bought and sold on a peer-to-peer network, independent of any central bank or government. Wilkins said bitcoin was not a reliable store of value, as its worth soared from pennies to more than $1,100 and then fell back to $300 in just four years. (Reporting by Leah Schnurr and Randall Palmer; Editing by Lisa Von Ahn)