Bank of England weighs in on bitcoin’s future

bankofengland

The Bank of England has established that the limited adoption of bitcoin does not pose an immediate threat to financial stability in the UK. Were the crypto-currency to be more widely adopted in the future, however, the BofE would recommend a re-think of the regulations surrounding bitcoin use.

In a quarterly report, the Bank of England weighed in on the limited threat bitcoin adoption poses to the British economy. The Bank notes that “digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom,” stating that the limited use of any crypto-currency prevents their being a threat.

It is estimated that as few as 20,000 people in the United Kingdom currently hold any bitcoins, and that as few as 300 transactions may be conducted by those people per day, says the BofE.

The BofE also sees serious challenges ahead of those trying to push for larger bitcoin adoption.

“The economics of the schemes as currently designed,” the Bank says, “both in terms of individuals’ incentives and at a macroeconomic level, pose significant challenges to their widespread adoption.”

A key attraction of some digital currency schemes at present is their low transaction fees. But as usage grows these fees may need to rise significantly. As digital currencies may follow a path towards a fixed predetermined supply, the Bank developed a hypothetical scenario in which the digital currency were used as the predominant form of money.

This, the BofE states, “would likely cause greater volatility in prices and real activity due to the inability of the money supply to vary in response to aggregate demand.”

Beside these problems, the Bank recognised the status of digital currencies as money as well as the distributed ledger technology used by them have potential to influence the financial system over time.

“Since the majority of financial assets such as shares or bonds already exist only as digital records, this opens up at least the possibility for distributed ledgers to transform the financial system more generally,” the Bank noted.

Were this situation to occur in the future, the BofE felt confident that many risks could be waylaid by additional regulations on bitcoin use.

“A variety of potential risks to financial stability could emerge if a digital currency attained systemic status as a payment system, most of which could be addressed through regulatory supervision of relevant parties,” the Bank said.

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