The next step that investment bank would have to take to
legitimize Bitcoin would be to regulate the securities valued and derived from
Bitcoin- without this, specific, structure of conduct, the market for
Bitcoin-based derivatives would spiral into the same destructive chaos that
consumed both the derivatives market in its infancy, and subprime-mortgage
market in its adolescent years. If Bitcoin securities are not managed or
overseen by an authoritative body- not necessarily the SEC- their volatility
will lead to eventual collapse, in the same vain as the dystopian, lawless
market, the above paragraph aims to avoid. An extension of this regulation
could be to introduce Reserve Requirement Ratios (RRRs) and discount or base
rates for Bitcoin lenders, to allow for greater control over this currency.
The penultimate method
by which the likes of Mr. Carney and the Mrs. Yellen would need to adapt to the
rise of the Bitcoin would be to accrue liquid reserves of the Bitcoin so that
they would be able to respond with shocks to the ‘foreign’ bilateral exchange
rates between their own currency and Bitcoin. In the same way that the huge
reserves of USDs in China, to support its pegged exchange rate, it may be
necessary for the Federal Reserve (Fed) and the BoE to attain Bitcoin reserves
to guarantee a reasonable amount of stability. Without this further
amalgamation of Bitcoin with Central Banks’ domestic currencies, Bitcoin will
become disenfranchised, and excluded from global markets, and may be abandoned
entirely. The accumulation of Central Reserves will also help to restrain the
almost inevitable process of deflation that will occur in the Bitcoin system.
The above step
leads, logically –as was hinted at in the closing sentences- to the final step
that Central Banks would have to take to acclimatize to Bitcoin. Managing
monetary stimulus through the procedures, such as Open Market Operations, in
Bitcoin, would be the final step that Central Banks would need to take to be
able to meet their goals, outlined in the opening paragraph. The Central Banks
would have to manage deflation possibly through the use of ‘Bitcoin bonds’
which it could trade with commercial lenders to increase liquidity, when
necessary.
The above mentioned
alterations to the relationship between Bitcoins and Central Banks would lead
to a very unfortunate problem for Bitcoin followers, and acolytes of ‘Satoshi
Nakamoto’. The Bitcoin, through these changes would essentially become the USD,
or the GBP, or the Euro, or the Hong Kong Dollar, or any other internationally
traded currency- the only difference being that it has no domicile. Another
unfortunate truth that supporters simply must come to terms with is that the
Bitcoin is a currency that is almost destined to fail, as it relies so heavily
on its rapid uptake and use that long-term, serious investments will plainly
not be made. This view was supported by another case involving Mt. Gox wherein
the price of Bitcoin fell by over 800USD within the space of a month (see Fig.
3). Despite this problem supposedly being with Mt. Gox, previously the world
leading Bitcoin exchange, alone, many other Bitcoin exchanges have faced drops
by as much as 200USD.
The only real thing that Central Banks of the world
need to do to contain Bitcoin is wait. In a recent Financial Times analysis
column[i],
Mark Williams (former Federal Reserve risk
examiner and a finance lecturer at Boston University’s School of Management)
highlighted that: Bitcoin is unregulated, and is decentralized, and thus cannot
properly develop without the fundamental structure of it being changed. The
article reads that even the most established currencies require an entire team
of highly skilled individuals to be managed, and that no algorithm that
contemporary computers can run will be able to replace this. Even if the
problem of the cap of the number of Bitcoins was solved; there would still be
countless other struggles that would arise, due to the irrationality that is a
fundamental part of human nature.
Kavi Chauhan- 05/02/2014
[i]
M. Williams (2014), A dangerous mistake lies at Bitcoin’s
intellectual core. The Financial
Times.
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