Thursday, September 11, 2014

Bank of England's Take on Bitcoin

Is bitcoin irrelevant to the U.K. economy? Well perhaps the biggest authority on that, the Bank of England, has weighed in on the cryptocurrency today, and its conclusion is basically thus: While bitcoins in circulation in the U.K. pose no threat to the financial system, and perhaps never will, the technology raises interesting possibilities that could one day have ramifications for stocks, other financial products and even physical assets like gold.

The bank estimates some 20,000 people (of a nation of 60 million at the moment) in the U.K. hold bitcoins. And daily transactions number about 300 or so.

As a proportion of the U.K. economy that’s obviously tiny: In all the £60 million of bitcoins circulating in the U.K. represent a tiny 0.003% of British broad money balances. All of which means that bitcoin currently represents no financial stability risk to Britain.

What’s more, there are reasons to believe that Bitcoin’s relative importance to the economy won’t grow much, the BOE’s economists add. Why? Well, although one of the prime attractions to bitcoin is how cheaply it can be transacted, its design suggests transaction fees would rise with usage and that could limit interest.

And its attractiveness as a medium of exchange is also limited by its volatility. With bitcoin’s total supply limited in advance, it won’t be able to respond to normal economic fluctuations in demand. So where a central bank can adjust liquidity to meet economic conditions, a bitcoin based economy would see the electronic currency’s value swing violently.

But the bank, which has touched on bitcoin before but has never opined in this level of detail, says all this doesn’t mean its uptake couldn’t change in future.

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