Ben Fung is Director of Economic Research and Analysis in the Currency Department of the Bank of Canada. His main role is to provide leadership in the department’s economic research program and to provide advice to the department on issues related to developments in retail payments and their implications for the demand for cash. Ben also has extensive experience in monetary policy research and analysis. From 2000 to 2003, Ben worked as senior economist at the Bank for International Settlements’ Hong Kong Office. He holds a PhD in economics from the University of Western Ontario.
Recent data show that the use of credit cards in Canada has been increasing, while the use of cash has been declining. At the same time, only two-thirds of small or medium-sized businesses accept credit cards.
The emergence of digital currencies such as Bitcoin and the underlying blockchain and distribution ledger technology have attracted significant attention. These developments have raised the possibility of considerable impacts on the financial system and perhaps the wider economy.
Merchants universally accept cash. Consumers widely hold cash but also carry debit and credit cards. The cost of using a method of payment has only a small influence on which method consumers use. Large merchants accept all payments, while only two-thirds of small and medium-sized businesses accept credit cards. Merchants report that credit cards are the costliest payment method compared with cash and debit cards. However, costs are not the only consideration. Merchant acceptance of credit accounts for the many con-sumers that want to use credit cards. This interaction between consumers and merchants is known as network externalities.
This paper studies the period in Canada when both private bank notes and government-issued notes (Dominion notes) were simultaneously in circulation. Because both of these notes shared many of the characteristics of today's digital currencies, the experience with these notes can be used to draw lessons about how digital currencies might perform.
Digital currencies have attracted strong interest in recent years and have the potential to become widely adopted for use in making payments. Public authorities and central banks around the world are closely monitoring developments in digital currencies and studying their implications for the economy, the financial system and central banks.