Speaking at the Bitcoin Finance 2014 Conference and Expo in Dublin today, Gareth Murphy, director of markets for the Central Bank of Ireland, made history becoming the first government-backed bank representative to speak at a digital currency conference.
Despite his presence amongst many of the technology's most avid supporters, Murphy used his address to both foretell of the innovation bitcoin could bring to global finance, while warning that the bitcoin community, too, needs to be cognizant of the added pressures their advancement may bring to global economies.
Addressing the crowd, Murphy said:
"Central banks, [out] of necessity, have monopolized the exercise of these functions. Virtual currencies pose new challenges to central banks' control over these important functions."
Though he recognized that economies often function with multiple currencies, with USD being a frequently used store of value internationally, Murphy noted that bitcoin would subvert the ability of central banks in the areas of data collection, economic analysis, policy formation, regulation, supervision, enforcement and resolution - and further, that the implications of such a change should not be overlooked.
On the subject of regulation, Murphy suggested that the bitcoin community should not assume that its actions will continue to fall under existing regulations as they are in the US, Switzerland and other parts of the world. However, he suggested that regulation would not necessarily be needed to control or suppress bitcoin, but rather to support unknown innovations that may result from the technology's wider use.
"We should not presume that current regulations are future-proof. It is possible that further innovations will mean that these regulations may no longer apply. This suggests that new regulations may ultimately be needed which are based on new legal concepts with a clear scope which must stand the test of time."
Held from 3rd-4th July at the Royal Dublin Society, BitFin 2014 will also feature appearances by BTC China CEO and Bitcoin Foundation board member Bobby Lee, Circle CTO Sean Neville and Blockchain CEO Nicolas Cary.
To begin his talks, Murphy invited gathered attendees to join him on a thought experiment that envisioned a world in which digital currencies are used for payments in "a substantial amount" of goods and services.
"In effect, economic activity is the aggregate of domestic transactions in the 'euro-denominated economy' and the 'virtual currency economy'."
In continuation, Murphy suggested four reasons why this dual economy may be likely to form, including the ease with which bitcoin can unite global consumers and merchants, the low cost of bitcoin payments, the openness of consumers to new innovations and the growing influence of technology companies.
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Bitcoin could threaten banks
Perhaps most notably, Murphy suggested that as digital currencies permeate economic activity, banks and major financial institutions are likely to feel the effects.
The comments come amid a rush of recent reports from major financial institutions that suggest they do not view bitcoin as an immediate risk to their operations.
In his remarks, however, Murphy suggests that, in his view, these organisations would be unwise to adopt this approach to the technology, stating:
"This is likely to have a profound operational impact on these firms and their regulatory risk profile."
Economic and monetary challenges
In this new hybrid economy, Murphy said central banks would face challenges first in regard to their statistical measurements of economic activity. Though a seemingly small detail, Murphy stressed that "the range of purposes for which national accounting measures are used in the stewardship of economies" should not be underestimated.
Digital currencies, Murphy continued, also challenge the way central banks calibrate monetary policy, exchange rates and set the price of credit. A development that he said would need to be "closely monitored".
"The existence of a 'euro-denominated economy' and a 'virtual currency economy' raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services)."
Murphy went on to cite the implications bitcoin could have for government control over taxes, maintaining the payment infrastructure, ensuring consumer protection and anti-money laundering.
For more on these subjects, view a copy of Murphy's full remarks here.
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