Thursday 31 July 2014

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



In rebuttal to this, there is the perspective that the almost inherent volatility of this currency will ward of any and all serious investors, as well as the public- Fig. 3 shows how quickly an ‘investment’ in Bitcoin can turn sour (in almost half a month, Bitcoins value fell by over 50%). Many commentators have reiterated this point- encapsulated when, in an interview with The Financial Times, Barry Silbert (founder of the Bitcoin Investment Trust) said:
‘For Bitcoin to move to the mainstream there has to be a high level of trust [and] a higher level of consumer-investor protection’[i]
To compound this, there is a huge flaw associated with the storage of Bitcoins that simply ignores the idea of human error- if a Bitcoin holder forgets their password to their Bitcoin ‘wallet’ they will have literally no other means of accessing them. Now, it can be said that the same applies for the storage of cash- it is much more difficult to lose $7.5million in notes and coins than it is in Bitcoins, as Mr. James Howells proved late last year in his desperate attempt to find a hard-drive upon which he had the details of 7,500 Bitcoins, worth approximately $7.5m at the time of reporting[ii] This then implies that any of the above evaluation of how badly Bitcoins could damage Central Banking is almost null and void. Although the aforementioned parties may be involved with Bitcoin to a lesser extent, there will still be collateral damage from the Bitcoins wider uptake, if Bitcoin is taken up as some suggest it will be.
Despite this, some still believe that the Bitcoin will stabilise- if one entertains this notion, it is possible to have a much broader and more colourful discussion in much greater depth. If the Bitcoin were to stabilise and act as a fully-fledged currency, in its own right, there would be a significant threat to the Central Banks of the world. The proliferation of the idea of a fully decentralised currency would mean that monetary policy, one of the main anti-inflationary tools available to Governments, would no longer be accessible. This would almost comprehensively block Central Banks from performing any and all of their abovementioned primary functions, provided their power remain unchanged in spite of industrial changes. Due to the organic evolution of regulation, and finance as an entity, this is very unlikely to happen- to answer the above question in short, the Bitcoin, in the long-run, may indeed change our systems, but the negative effect on Central Banking will be negligible. Governor Carney has shown this, perfectly, when he adjusted the Bank’s stance on Forward Guidance. Before entering the monetary structure the UK knows today, it has worked using the European-exchange Rate Mechanism (ERM), the Gold Standard, and varying other degrees of Bank of England (BoE) independence.
For the Central Banks of the world to adapt, however, there are four key steps that must be taken so ensure their survival, they will have to: begin regulation and monitor transactions that take place under Bitcoin; manage Bitcoin loans and securities (as perhaps an extension of the Securities Exchange Commission); begin accruing liquid Bitcoin reserves; and finally control monetary injection and stimulus to avoid deflationary spirals. Once these have been discussed, an unfortunate truth will no doubt yield its ugly head.
The first of these four steps may prove to be difficult as many see the main attraction of Bitcoin to be its anonymity and confidentiality, as has been shown with the recent ‘Silk Road’ trial:
‘Silk Road... a “sprawling black-market bazaar” used by drug dealers ... to distribute hundreds of kilograms of illegal drugs and launder hundreds of millions of dollars’[iii]
Ross William Ulbricht ran this multimillion dollar enterprise and allowing drug dealers all over America and the world to exchange products, using Bitcoins and the alias ‘Dread Pirate Roberts’. He has recently been charged on four counts: operating a narcotics-trafficking scheme; money laundering conspiracy; computer hacking; and operating a continuing criminal enterprise. This could culminate in a final sentence of a minimum of 30 years. This, however, is just one case out possibly hundreds or thousands that have simply not been uncovered, yet. To stop the proliferation of these types of enterprise, it is necessary to begin integrating regulation slowly to this market- if we suddenly impose huge regulations, consumers may simply stop using Bitcoins, even if they are not partaking in the more sinister side of the currency. By tackling the problem of Tor –a global network of volunteer relays making it almost impossible to trace someone’s whereabouts or online activity- Central Banks will be able to make major headway on breaking down the ‘Dark Web’. This sudden abandonment of a currency, almost fully ingrained in our society -as is the case with this model- would lead to a widespread collapse of businesses that rely upon it, not too dissimilar to the collapse of the Gold Standard.

 
Fig. 3

[i] S. Foley (2014), Bitcoin enters a new phase. The Financial Times- FT World.
[ii] Unknown (2013), James Howells searches for hard drive worth £4-worth of Bitcoins stored. BBC News- South East Wales.
[iii] P. Hurtado (2014), Silk Road’s Ulbricht Gets Trial Date in Online Drug Case. Bloomberg Technology.

No comments:

Post a Comment