Digital currencies such as Bitcoin will not be safe without government intervention and are likely to be counterfeited, according to a Bank of Canada report drawing on the lessons off private bank notes in the 1800s.
The paper examines what happened when both private bank notes and government issued notes were simultaneously in circulation, arguing that both share many characteristics with today's digital currencies.
The authors conclude that before the Bank Act of 1890, private bank notes were only "relatively" safe and not a uniform currency. Meanwhile, government issued 'Dominion' notes were safe but were not a uniform currency until 1882.
Drawing lessons from this experience, the report argues that "well designed and managed private digital currencies could circulate widely but only with appropriate government regulation to ensure their safety, soundness, and uniformity".
In addition, private digital currencies are likely to be counterfeited and are unlikely to be inflationary. And, while a central bank can always bet its digital currency into circulation, this will not necessarily drive out private alternatives.
Read the full report.