I see the reality as lying somewhere in between these two
proposals- it is the case that Bitcoin has the latent ability to set a great
upheaval in the global currency market in motion, not out of its own means, but
through the idea behind it. A supranational unit of account; medium of
exchange; and store of value is an attractive one, to many, due to its inherent
simplicity- this does not; however imply a decentralized or unregulated
currency. Monetary policy can be developed for a global currency, in the same
way in which it was developed for the Eurozone- for the sake of time, we shall
not discuss the Single Currency and its restraints, but the possibility is
still there.
Paul Krugman, late last year, wrote an opinion piece
denouncing the Bitcoin as both a store of value; and as a medium of exchange[i]- without substantiating
the latter of the two, however. He claimed that whenever he asked after
arguments for the Bitcoin as a store of value: ‘they always seem to come back with explanations about how it’s a
terrific medium of exchange.’ This is a worrying statement that when
compounded with the economic analysis from the ECB, makes Bitcoin seem
extremely dangerous, not just to central banks, but to the global economy.
Where Krugman lacked actual economic evaluation of the wider consequences of a
growing Bitcoin, the ECB, as one would expect, was very strong. The ECB, in the
main section of its report, note the strengths in Hayek’s arguments by following
through the theory that the Bitcoin would begin to break down the monopoly of
currency that Central Banks have to allow Market forces to decide the
currencies that are used, allowing for greater allocative efficiency of
different monies.
In more recent news, many Bitcoin exchanges have
come upon some quite serious difficulties due to cyber-attacks and software
problems that have caused these trading platforms to cease operation,
temporarily[ii].
The problem of ‘transaction malleability’ has meant that situations wherein
third parties have been receiving payments in Bitcoins could have the details
of the processes changed so that individuals may defraud them, and claim that
transfers have not occurred. Mt. Gox, one of the first Bitcoin exchanges, and one
of the market leaders, has even blocked all transfers whilst it deals with the
issue: others such as Bitstamp, in Slovenia; and BTC-e, in Bulgaria, have faced
provisional closure due to related problems.
This links, very well, back to our original question-
does the Bitcoin pose a threat to Central Banking? From this analysis, it would
seem so- with an increase in competition from a currency that is a seemingly
superior medium of exchange, many individuals will surely move away from
Central Banks, disenfranchising them almost entirely. This analysis does not,
however, give the long-run picture- there is a great risk to the currency, and
all with which it is involved due to deflation. When, eventually, all 21million
Bitcoins are mined, if the number of users continues to grow, at a faster rate
to the rate of increase of the velocity of money, in the system, in line with
Fisher’s Quantity Theory of Money, deflation will incur. This however, may
affect a cyclical, further increase in deflationary pressures, through the
depreciation of all goods and services priced in terms of Bitcoins- this will
create a spiral as the velocity of money will slow due to consumers holding
onto funds as they will automatically appreciate. Despite how far-fetched this
all seems, it could lead to an eventual collapse of this already immature
currency, as almost all products (fungible or not) that are priced in Bitcoins
are also priced in (US Dollars) USDs or (Great British Pounds) GBPs. This is
becoming ever more pertinent with expansion of Bitcoin pricing structures on
goods and services with niche SMEs, looking for wider consumer bases. A
collapse at this point in the Bitcoin’s life would wreak havoc throughout the
banking system: investors who have rooted high-leverage operations in the
Bitcoin would face a liquidity crisis, and consumers who have used Bitcoins as
collateral on loans may face mortgage crises. The further integrated the
currency becomes with our society, the more potentially dangerous to Central
Banks it will become, if the process is not changed.
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