Does Bitcoin threaten to destabilize the global financial system? A new article published by the Bank of Canada says maybe.
"There could be potential risks to overall financial stability if Bitcoin became a significant means of payment and the Bitcoin system remained unstable," Gerald Stuber of the central bank's currency department writes in the spring 2014 issue of the Bank of Canada Review, released on May 13.
Titled "Bitcoin: A Digital Currency Without a Central Issuer", the article is included as a box within a larger paper on platform-based digital currencies, such as Amazon Coins and World of Warcraft gold.
Stuber notes that Bitcoin is a totally decentralized currency that's based on open-source software. He mentions that Bitcoin "solves" the problem of duplication or counterfeiting by using its network of users to validate transactions.
His article talks about the "not regulated" cryptocurrency's risks—"extreme volatility", exchange failure, and the ease of misplacing your holdings—but it also points out two positives: "Potential benefits associated with bitcoins include lower transaction costs to online merchants than for conventional payment instruments such as credit cards, since there is no third-party intermediary. Similarly, the costs of international remittances might also be lower than for conventional remittance methods."
Stuber briefly sums up, from a regulatory perspective, the state of Bitcoin in Canada: "Although Bitcoin automatic teller machines have been introduced in some major Canadian cities, very few Canadian merchants accept bitcoins as a means of payment. And while the Department of Finance Canada has indicated that the Bitcoin currency is not legal tender in Canada, the Canada Revenue Agency has announced that standard tax rules apply in the use of bitcoins or other digital currencies."
He notes that governments are concerned that "bitcoins could easily be used to facilitate criminal transactions and to evade taxes". (As Bitcoin supporters often say, cash has long been used for these purposes.)
Stuber ends his article with a warning to users: "As well, Bitcoin users need to be aware of the potential financial risks to which they might be exposed, in light of the ongoing volatility of bitcoin prices and the risk of failure of Bitcoin exchanges. 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."