Virtual currencies won't replace cash, central bank says

The Bank of Canada waded into the debate over the prevalence of virtual currencies such as Bitcoins, saying in a working paper published this week it'sunlikely that such digital forms of payment will ever replace sovereign currencies.

Joshua S. Gans from Rotman andHanna Halaburda from the bank's currency department discuss the rise of many digital currencies in the paper, but they draw a distinction between platform specific currencies such as those used by Facebook, Microsoft an other digital titans to get users to pay for purchases within the platform, and others such asPayPal, M-Pesa, Bitcoin or Liberty Exchange which are designed as digital ways of exchanging real-world currencies.

• Read the Bank of Canada's research paper on virtual currencies here

None of these forms is a viable competitor to state currencies, they said.

"We find that it will not likely be profitable for such currencies to expand to become fully convertible competitors to state-sponsored currencies," the authors said

With more than onebillion users worldwide, a digital currency such as Facebook Credits could theoretically rival or eclipse the liquidity and use of many real world currencies.

Facebook recently abandoned the Creditsprogram because of the confusion over other currencies used inside Facebook apps. If an entity as ubiquitous as Facebook didn't see the utility of moving their payment model to supplantreal dollars, it seems to be unlikely that any others will, the report said.

"Wouldit be worthwhile for a currency such as Facebook Credits to move from limited convertibility to full convertibility?" the paper asks."If the answer is nothe concerns being raised are potentially overblown."

That's possibly not the case with other digital currencies, namely Bitcoin. The digital currency rose to prominence this year with a highly publicized increase in its valuation to stratospheric levels.

Just this week, a publicly traded Canadian miner has agreed to pay a contractor in Bitcoinsfor exploratory work. And last month, the world's first Bitcoin ATM opened in Vancouver.

"[There are]issues as to whether such platform-specific currencies should be subject to additional regulation and oversight," the paper reads.

They note that in the U.S., regulators have saidtransactions of more than $10,000 worth of any digital currency require reporting to the Treasury because they now fall under new money-laundering rules.