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.
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