What does the rise of the Bitcoin imply for the future of Central Banking? (Pt. II)

Before we continue, the operational goals for a central bank must be outlined. Central Banks aim to control inflation, primarily, but also exchange rates, support governmental fiscal policy; and aid financial stability through the use of: base rates, asset purchases, and possible exchange rate pegging or artificial alterations (i.e. Monetary Policy). Many commentators and supporters of Bitcoin have stated that it will be a great challenge to the authority of central banks, and will dethrone many of the international currencies of the modern world. The following analysis and evaluation should place these assertions to rest, showing the true nature of Bitcoin’s future.
 

The ECB outlined, in their aforementioned report, that, due to the volatile nature of the Bitcoin (and other Type 3 currencies- Fig. 1), there are very few links between the virtual and real economies- this is, however, changing with the likes of the Winklevoss twins calling for regulation of the Bitcoin to avoid potential illegal activity utilising the Bitcoin’s anonymity[i]. This increase in virtual-real activity has been evident in the emergence of Bitcoin backed derivatives and other financial instruments[ii]- firms such as Predictious, in Ireland, have begun offering the ability to buy and sell ‘put’ and ‘call’ positions on Bitcoins in options spreads, with over $300,000 already deposited. It has also been taken up by High-Frequency Trader (HFT) Perseus[iii] , despite transaction times of up to half an hour. There have also been cases, such as Trendon Shavers’, where Bitcoins have been used to run Ponzi Schemes[iv] and other money laundering operations- Bitcoin is a lot more real than we thought.
 

 The Bitcoin is indeed a revolution, and may even change the way in which some regard currency, as a concept- it must be asked if this could be a step towards Keynes’ Bancor, he dreamt of at Bretton Woods. Some stipulate that Bitcoin is simply a liberalist instrument for unhinging Central Banks of the world[v], from the way in which Nakamoto’s paper was written; whereas others see it as an insignificant fad. The rather radical incentive, suggested, behind the first idea is unlikely to be the complete reason for the establishment of Bitcoin, and the perspective promulgating the suggestion that Bitcoin is unimportant, as it does not appreciate the gravity of the concept; potential for development; and significance of the advancements already made, and thus can be strongly contested.

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[i] S. Foley (2014), Winklevoss twins call for virtual currency ‘sheriff’. The Financial Times.

[ii] T. Durden (2013), The Bitcoin Derivatives Market Has Arrived. Zero Hedge.

[iii] P. Stafford (2014), HFT service provider Perseus to accept payments in Bitcoin. The Financial Times.

[iv] K. Scannell (2013), Texan accused over alleged Bitcoin Ponzi Scheme. The Financial Times.

[v] C. Stross (2013), Why I want Bitcoin to die in a fire. Anitpope.org.