Central Banks Battle Against The Rise of Bitcoin

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Central Banks Exploring Use of Digital Currencies?

As bitcoin and other cryptocurrencies continue to soar in popularity, many central bankers are now keenly debating whether to start issuing digital currency for the first time. In a report released last month, the Swedish Riksbank suggests that consumers would benefit from an e-currency that gives them access to “risk-free” central bank money. The “e-krona” would be issued by the central bank and represent a claim against the central bank, in the same way that a bank note does.

This is an interesting development in the journey of cryptocurrencies which have typically been viewed as a threat to central banks and traditional financial institutions. As bitcoin is not generated by a central authority and is used in peer-to-peer transactions, it removes the role of central banks and represents a more democratic payment system.

Bitcoin Safe from Manipulation

Unlike the traditional financial ledgers maintained by central banks and financial institutions, the bitcoin ledger (called the blockchain) is updated and maintained by each individual user and tracks and records all transactions. The benefits of this are many, including there being no gatekeeper fees or transaction costs and because the records are accessible to everyone, they cannot be manipulated. Recent scandals in FX markets such as the rigging of LIBOR have seen more and more people turning to Bitcoin and other cryptocurrencies as a protest against the traditional abuse of financial markets seen in the traditional currency space.

Bitcoin Protects Against Political Risk

Furthermore, as Bitcoin is not issued by central bank’s or controlled by governments it does not suffer the typical volatility induced by political risk that we see in traditional currencies. Given the increasingly unpredictable nature of political events as we have seen over the last two years, this makes Bitcoin an attractive prospect for anyone looking to protect their wealth from fluctuations linked to political events and indeed, geopolitical risks.

Concerns About Use By Terrorists

However, there are concerns that because cryptocurrency transactions are made and recorded on an anonymous basis, that terrorists could be using it. As known terrorist groups and members are largely denied access to the international financial system, many governments argue that they will use the anonymity offered by cryptocurrencies to fund their operations.

This is another point that is often used by those who argue against the growing use of these cryptocurrencies. However, supporters of Bitcoin and similar digital currencies highlight the fact that it isn’t simple to quickly transfer large amounts of money on these systems and that there isn’t a high degree of acceptance of these currencies in the Middle East and North Africa.

SNB Considering Digital Currency Also

Alongside the Riksbank report, suggesting the benefits of using digital currency, the SNB is also thought to be exploring the potential for using digital currency. Cryptocurrencies are surging in popularity in the fintech hub of Switzerland where the foundation behind Ethereum (a cryptocurrency similar to Bitcoin) is based. As the number of transactions settled in Bitcoin continues to build, the SNB are facing the question of whether to allow these transactions to be made in an unmanage currency or whether they should release their own digital currency to provide an alternative.

How Will Digital Currencies Evolve?

The fact that government’s and central banks are now considering the use of digital currencies is a clear indication of their belief that these new cryptocurrencies will replace traditional currencies over time; a significant contrast to the earlier thinking that these new currencies would never really take off in popularity. However, digital currency issued by central banks would not be of the same democratic, anonymous nature as Bitcoin as the bank would still control the money supply, so it will be interesting to see how consumer’s respond. While there is undoubtedly a large percentage of people using Bitcoin for idealistic, political reasons, there is likely to be a higher number who use it for the sake of ease and so if central banks can offer a viable alternative perhaps they can stem the rising tide of bitcoin users.

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