The Bank of England released a report today after what it termed a lengthy investigation about digital currencies like Bitcoin. The report described cryptocurrencies and even went as far as saying that the idea was essentially ingenious and then moved on to talk about these currencies in present tense, describing its current market penetration. The report was prepared by four of the bank’s officers: Robleh Ali of the Bank’s Financial Market Infrastructure Directorate, John Barrdear of the Bank’s Monetary Assessment and Strategy Division and Roger Clews and James Southgate and was included in the Bank’s Quarterly Bulletin.
- The Bank of England
If you are a crypto enthusiast and have read the report than you were no doubt amused after reading this report because the writers were seemingly so short sighted. The report begins by describing the traditional banking definition of money. Money must have three features:
- Store of Value to allow transfer of purchasing power
- Medium of Exchange so that payments can be made
- Unit of Account to measure value
The Bank found that about 20,000 UK citizens possessed Bitcoin and that, in general, they considered it a store of value rather than a medium of exchange. They said that because of this Bitcoin cannot be considered money under the Bank’s definition. They also estimated that only about 300 transactions a day are made in Bitcoin in the United Kingdom. The report concluded that while Bitcoin was not a current threat to English banks, and very well never would be because “significant” barriers. One important note however is the discussion of the fixed number of coins that most cryptocurrencies feature and the reports assurance that this rule was not built into the code and could be manipulated.
But is the report correct? The Telegraph seems to think so in its report when it said:
“The Bank has an extremely technical insight into the workings of the digital currency.”
Which is laughable when you consider that the description of digital currencies given in the report is something that you would give a person who had never heard of the concept before: It was hardly an in-depth analysis of digital currencies. The report also indicates a possible plan by the banks to try to hijack blockchain technology. The report said:
"Distributed ledger technology represents a fundamental change in how payment systems could work. And in principle, this decentralized approach is not limited to payments,"
The fact is however that the Bank’s report either accidentally or intentionally ignored a great deal of evidence that indicates the exact opposite of their findings and they completely ignored international impact. In actuality, the report seems more like a piece of candy to make the Board feel better than an honest assessment of digital currencies and their potential effect.
It is difficult to see how the bank, with any accuracy, would be able to estimate the number of people who own Bitcoin in Great Britain and estimating the number of transactions per day would be nearly impossible because transactions are carried out by business all over the world in a p2p network that the banks have no access to for information. The report also failed to note that some of the largest online businesses in the world, such as the Paypal owned Braintree, Overstock, Dell computers, Expedia and DISH Network, all companies that do business in the UK, are now accepting Bitcoin. BitPay, one of the world’s leaders in digital currency business solutions, has a client base of tens of thousands of merchants and Coinbase exceeds that number. The Isle of Jersey is actually talking about becoming “Bitcoin Island”. The report also failed to note that Bitcoin was already being used to make retail purchases, both large and small, which gives like to the idea that Bitcoin has no unit of measure or medium of exchange.
The reason for the report however can be found in the following statement:
“The Bank continues to monitor digital currencies and the risks they pose to its mission. If a subset of people transacted exclusively in a digital currency, then the Bank’s ability to influence demand for this group may potentially be impaired. Should they achieve limited adoption as a payment system, they are unlikely to undermine the Bank’s ability to achieve monetary stability. While that could, in theory, change if sterling were abandoned in favour of an alternative currency for a significant fraction of the economy, such a scenario is considered extremely unlikely at present”
The operative part of that sentence is “…the Bank’s ability to influence demand for this group may potentially be impaired.” The Bank’s do understand that Bitcoin will eventually become an existential threat if allowed to survive. They are also very clear of the intention of reining in this threat by using “regulation”. Realistically, for 95% of the world’s population, banks are used for one purpose: They keep your money safe and give you easier access. They do provide many other services but most of them do not apply to most people. Digital currencies remove the need for bank security and at the same time eliminate most transfer and remittance fees. If the ability to “influence demand” is removed from the banks so will the centralized ability to control the finances of the masses artificially.
Cointelegraph Staff Reporter Tone Vays has worked on Wall Street for nearly a decade and is an expert in finance. After reading the report Tone had this to say:
“The report continuously refers to digital currencies as “schemes” which show a complete disrespect for this revolutionary technology and gives the impression that they are trying to label them as something notorious like “Ponzi Scheme”
This report once again proves that most traditional economist and especially the ones employed by Central Banks do not understand the concept of an “exponential function”. This is the reason why Keynesian economic models are breaking down and debts of developed countries are going through the roof which is cause smart people to consider alternatives. Digital Currencies might not be a threat today, but once another big bank fails or there are rumors of “bail-ins”, Digital Currencies will experience “exponential adoption” and this Central Bank will not be able to form a comity for the latest report fast enough before they know what hits them. The banks brag about maintaining “stability” but the truth is that 2% indefinite inflation is not stability, it is implosion.
Tone has a valid point. The record of the banks over the last century has been dismal at best. The record of the banks over the last century has been dismal at best. Their irresponsible actions have directly resulted in three major economic crises during the last century alone. Under the current economic paradigm, money cannot be created unless people are in debt to the banks. The report is correct in saying that Bitcoin and cryptocurrencies are not a current threat but dead wrong is saying that they will probably fail. Despite the reports negative outlook on Bitcoin acceptance during the last year alone tens of thousands of business have begun to accept cryptocurrencies and because the nature of digital currencies the United Kingdom can hardly maintain an isolationist attitude.
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