Digital currencies are creating new questions for central banks about the future of money and their ability to conduct monetary policy. As Bitcoin and other forms of electronic money gain attention, policymakers must consider what could happen if privately issued currencies become widely used as alternatives to traditional national currencies.
The Bank of Canada is examining these issues as part of its broader consideration of financial and payment innovation. Senior Deputy Governor Carolyn Wilkins has highlighted concerns ranging from the ability of central banks to serve as lenders of last resort to questions about who should issue electronic money and benefit from its creation in an increasingly cashless economy.
Bank of Canada Senior Deputy Governor Carolyn Wilkins has said in a speech that the country’s Central Bank is considering the impact that Bitcoin and other digital currencies could have on monetary policy. The speech centered on how innovation can create new monetary policy tools at a time when interest rates are near zero.
Commenting on cryptocurrencies and whether these currencies could usurp national currencies, Wilkins said,
“this would create a new dynamic in the global monetary order, one in which central banks would struggle to implement monetary policy…. central banks couldn’t act as lenders of last resort as they do for their own currencies. This means that households and businesses could suffer important losses if such an e-money were to crash.”
Wilkins also commented on the prospects of a cashless society saying,
“Consider a cashless society where everyone uses e-money, which is monetary value stored electronically and not linked to a bank account. If this money were denominated in Canadian dollars, who should issue it? Who should earn the seigniorage? The central bank, as it does today, or the private sector? What would the financial system look like in each case?”
While Central Banks around the world are becoming more proactive in considering new payment technologies like Bitcoin and other digital currencies, Canada has been among the forefront with its own digital currency solution (MintChip) that was eventually sold off and is demonstrating its continued thought leadership on the subject.
The emergence of Bitcoin and other digital currencies could have implications extending well beyond payments. If consumers and businesses increasingly hold and transact in privately issued currencies rather than national currencies, central banks could face new challenges in influencing economic activity through traditional monetary policy tools.
A transition toward a cashless society raises additional questions about the structure of the monetary system. Electronic money denominated in national currency could potentially be issued by central banks or private organizations, with each approach carrying different implications for financial institutions, consumers, and the role of government in the payments system.
The Bank of Canada’s experience exploring digital currency through MintChip demonstrates that these questions are not purely theoretical. Although the project was ultimately sold, it provided an early example of a central bank examining how new forms of digital money could function within an established financial system.
As payment technology continues to evolve, central banks will need to determine how innovations such as Bitcoin and other digital currencies affect financial stability, monetary policy, and their traditional responsibilities. Canada’s continued examination of these issues positions the Bank of Canada among the institutions actively considering how central banking may need to adapt to a more digital monetary environment.
Overview by Tristan Hugo-Webb, Associate Director, Global Payments Advisory Service at Mercator Advisory Group
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