When Google announced that bitcoin merchants would be allowed to buy ad space on their pages starting in August, central banks were alerted to the next likely increase in cryptocurrency advertising.
The growing activity around digital currencies has not gone unnoticed at the Bank of England, and on June 7, the brightest of Threadneedle Street will publish a consultation paper, laying out how a publicly operated electronic currency system could work, one that would rival bitcoin.
The report is a preliminary post on the bank’s work on digital currencies, and will also assess the prospects for so-called stablecoins, those whose value is tied to something that already has a value.
Bitcoin is many things, but it is not a stable currency, according to Brian Davidson, an economist at Fathom Consulting. Bitcoin fails the three main tests of a currency: that it is a store of value, that it qualifies as a unit of exchange, and that it is a unit of account.
Its supporters say bitcoin’s soaring value, from less than £ 2,000 four years ago to £ 45,000 in April, shows that it is a store of value but, Davidson says, to the same extent it might also be worthless one day. And its volatility – bitcoin’s value has plummeted 40% to roughly £ 26,000 since that April high – means tourists wouldn’t know overnight how much to spend.
However, the idea of a publicly formulated and operated digital currency, backed by the Bank of England and ultimately the British government, runs counter to all tenets of a digital currency like bitcoin, which operates outside of the banking regulations.
Bitcoin allows payments to be sent between people’s digital wallets without anyone else knowing they happened, which is why it has been called a money launderer’s paradise.
Larry Summers, a former economic adviser to Bill Clinton, has criticized the US Federal Reserve for its apparent lack of concern about the rise of digital currencies.
This criticism could not be directed at Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, who has given several speeches on the subject and said last month that it was “likely” that the state would need to issue some form of digital cash to retain public confidence in money.
“Knowing that depositors under stress have the option to switch to state money can be important in preventing a more widespread loss of confidence in the money,” Cunliffe said. That assumes digital currencies will become big business and millions of people who choose to store money in an electronic wallet and pay for a service with it, only to be disappointed when the service is not provided, deserve a backup option.
Cunliffe is part of a working group examining the benefits and challenges of digital currencies and will also present the findings of a consultation asking how many people wanted it and why.
The banking industry will be interested in hearing how the current form of digital money, which most of us use for payments from our phones, computers, and debit cards, should be scrapped in favor of one that, while it seems modern, will, a once surrounded. Because of protections and regulations, they operate much like money. Summers was an early enthusiast, but now he says that cryptocurrencies could be something akin to gold, kept aside from conventional money transfers.
“Gold has been such a prime asset for a long time,” he said. “My guess is that cryptocurrencies are probably here to stay as a kind of digital gold.”
Maybe that would do the Bank of England good.
George is Digismak’s reported cum editor with 13 years of experience in Journalism