Thursday 15 May 2014 11:04 am

Central bank report says Bitcoin could threaten the global financial system

A report by the Bank of Canada (BoC) has warned that the widespread adoption of cryptocurrency Bitcoin could bring serious risks to the established financial system.

Entitled Understanding Platform Based Digital Currencies, the authors wrote "there could be potential risks to overall financial stability if Bitcoin became a significant means of payment and the Bitcoin system remained unstable".

The central bank highlighted a number of problems encountered by Bitcoin users, particularly price volatility. The report said users faced considerable risk when interacting with the cryptocurrency, pointing to the series of security scandals that have engulfed Bitcoin in recent months.

A host of Bitcoin exchanges including MtGox have been forced to close, while hundreds of thousands of dollars worth of the digital currency have been stolen.

However, the report was not oblivious to the many advantages of a decentralised peer-to-peer currency, including lower transaction costs for online merchants, since there are no third-party intermediaries. The cyrptocurrency can also slash the cost of the remittances.

Last year, Kenyan start-up BitPesa announced plans for a money transfer service to compete with the likes of Western Union by using Bitcoin.

Established providers such as Western Union deduct between $10 (£6) to $17 (£10) from a wire transfer of $200 (£122) from the US to Kenya, and the money can take as long as five days to clear.

BitPesa by contrast is planning to charge three percent on overseas transfers and claims the money will arrive the same day. A wire transfer of $200 using BitPesa would cost just six dollars.

The warnings given in the BoC document are a far cry from what the central bank's top officials were saying about Bitcoin just last month. In April, top officials from the Canadian central bank said they were not worried about the rise of Bitcoin and other digital currencies.

Speaking to the Senate banking committee, BoC governor Poloz said "these are early days … and so far digital currencies have not made it to what we call money."

"We’ve got a ways to go before we need to be thinking about policy implications," he added.

However, senior deputy bank governor Tiff Macklem, conceded that if Bitcoin takes off in a major way it could impact the Bank of Canada's ability to control the money supply.