The Bank of England (BoE) has published an article on the role of money in the modern economy and one topic was the future of digital currencies and payment technologies. The currency v commodity debate has been going on for a while and the Bank of England is clearly on the commodity side of the argument.
“Digital currencies are not at present widely used as a medium of exchange. Instead, their popularity largely derives from their ability to serve as an asset class. As such they may have more conceptual similarities to commodities, such as gold, than money,” the bank concluded.
Not a generally accepted medium of exchange
Digital currencies were brought up in the context of alternative currencies and recent developments in payment technologies. The advent of e-money and services like PayPal and Google Wallet was discussed and the bank concluded that these forms of money have similar features to bank deposits.
“For example, money in an e-money account represents a store of value so long as the companies providing it are seen as trustworthy. E-money can also be used as a medium of exchange with businesses (such as online sellers) or individuals that accept it,” the report points out, adding:
“However, it is still not as widely accepted as other media of exchange, for instance, it is not generally accepted by high street shops. Transactions using these technologies are also typically denominated in the existing unit of account (pounds sterling in the United Kingdom).”
Digital currencies are quite a bit different, since they can be created out of nothing and their exchange rate is not fixed. The supply of digital currencies is typically limited, which is not the case with e-money accounts.
The bank also outlines some basic differences between local currencies and digital currencies. The former are issued in a defined environment, they are not decentralised and they are usually bought in exchange for currency at fixed rates. This of course is not the case with digital currencies, as they do not have a fixed rate and they are practically their own unit of account.
Bank of England not to keen to weigh in
The Bank of England has not said much about bitcoin in the past. It seems it simply does not think bitcoin is big enough to worry about, or as the bank puts it:
“The current levels of economic activity and payments involving bitcoin are too light to have a material impact on [the bank’s] monetary or financial stability objectives in the short term.”
This is not the case with most European central banks and the ECB for that matter. Many of them have already issued similarly worded bitcoin warnings, cautioning the public about potential losses stemming from volatility, fraud, theft and a range of other issues.
Speaking at a bitcoin panel discussion last year, BoE chief cashier Chris Salmon described bitcoin as “genuinely innovative,” but he warned that it would not be the “final word” in digital currencies. In other words, something better could eventually replace bitcoin.
Salmon also said that it is highly unlikely that central banks will issue digital money in the next decade, but he admitted it is a possibility sometime in the future. Salmon believes digital currencies in their current form cannot replace traditional money, but they can complement it.