The Bank of Canada has joined the list of bank-related institutions to commission research papers regarding the use of digital currencies, particularly Bitcoin. Its two authors came up with an economic framework to analyze their exchange rates. Blockchain as a challenge for central banks The Bank of England had earlier released a research paper that studied the macroeconomic consequences of issuing central bank digital currency (CBDC). The 2015 paper by the Bank for International Settlements noted that the emergence of distributed ledger technology could present a hypothetical challenge to central banks by reducing their functions and, in an extreme case, may obviate their need as a central body entirely for certain functions. The paper, written by Wilko Bolt of De Nederlandsche Bank , The Netherlands and Bank of Canada’s Maarten R.C. van Oordt, suggests that the exchange rates of various virtual currencies may diverge widely depending on adoption, transactional demand, the quantity and growth rate of monetary units, speculative demand and network stability (survival probabilities). The value of virtual currencies However, the research for the Bank of Canada seems compact in its focus. In the paper titled On the Value of Virtual Currencies , its model predicts that the exchange rate of virtual currency will become less sensitive to the impact of shocks to speculators’ beliefs as it becomes more established. The prediction undermines the notion that excessive exchange rate volatility will prohibit the widespread use of virtual currency particularly as speculative motives are widely believed to be an important factor for the value of virtual currencies. More use cases are needed The authors say virtual currencies, such as Bitcoin, represent both the emergence of a new form of currency and a new payment technology to purchase goods and services. Their widespread use by merchants and consumers lowers the […]
