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Bank of England addresses Bitcoin questions

FXStreet (London) - In its Quarterly Bulletin, the Bank of England(BoE) has released two papers looking at the emergence of digital currencies such as Bitcoin.

Rather than the debate over the nature of the currencies themselves and their volatile behaviour, paper on “Innovations in payment technologies and the emergence of digital currencies” instead looks at the decentralised nature of the currencies and the “distributed ledger” technology which allows payments to operate without banking intermediaries – including central banks like the BoE.

The second piece on “The economics of digital currencies” looks at the “moneyness” of digital currencies.  It argues that while digital currencies could, in theory, serve as money for anybody with an internet-enabled device, at present they serve the roles of money only to a limited extent and only for relatively few people. The BoE paper estimates 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.
The article also argues that the economics of the schemes, as currently designed, pose significant challenges to their widespread adoption:
- At a microeconomic level, a key attraction of some digital currency schemes at present is their low transaction fees.  But the incentives embedded in the current design of digital currencies mean that these fees may eventually need to rise significantly, as usage grows.

- At a macroeconomic level, most digital currencies, as currently designed, incorporate a predetermined path towards a fixed eventual supply – a feature which, in a purely hypothetical scenario in which the digital currency were used as the predominant form of money, 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.
The BoE article concludes that:
Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom, given the small size of such schemes.  For instance, it is estimated that there is less than £60 million worth of bitcoins circulating within the UK economy, which represents less than 0.1% of sterling notes and coin and only 0.003% of broad money balances.  [While} potential future risks to monetary and financial stability but notes that while conceivable, these risks could only emerge if the size of the schemes were to grow significantly.  The Bank continues to monitor digital currencies and the risks they pose to its mission.

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