The Organisation for Economic Co-operation and Development (OECD) has published a working paper on bitcoin that draws largely positive conclusions about the technology behind the digital currency.
The paper, titled ‘The Bitcoin Question: Currency Versus Trust-less Transfer Technology’, concludes that while there are concerns about bitcoin related to tax evasion, fraud and money laundering, for example, the bitcoin protocol could have a significant role to play in the financial system:
“The technology associated with cryptocurrencies […] could ultimately shift the entire basis of trust involved in any financial transaction. It is an innovation that creates the ability to carry out transactions without the need for a trusted third-party.”
The working paper is written by Adrian Blundell-Wignall, an economist and the Special Advisor to the Secretary-General on Financial Markets at the OECD. He is also Director in the OECD’s Directorate for Financial and Enterprise Affairs.
He was previously Head of Research at the Reserve Bank of Australia and has also held senior posts at an Australian asset management firm.
Trust-less exchange technology
The paper lauds cryptocurrencies’ ability to conduct transfers using decentralised technology without the need for middle-men or trusted third parties. It cites a Goldman Sachs report comparing the Coinbase fee of 1% for transactions against fees of up to 8.9% for money transfers.
Cryptocurrencies, it argues, could therefore reduce transaction costs for credit card spending, e-commerce and money transfers.
Blundell-Wignall also describes the Ripple protocol as a potentially superior trust-less transaction mechanism to bitcoin. According to the paper, Ripple wouldn’t require the “increasingly computer intensive and costly” mining associated with bitcoin. However, it would still produce reduced transaction costs and speedier transfers.
The paper, therefore, calls for policymakers to embrace cryptocurrency technologies:
“Policymakers should welcome the exploration of the use of new technology to improve efficiency and provide competition to high-cost incumbent intermediaries in the financial system.”
Not a currency
However, Blundell-Wignall draws a sharp distinction between the bitcoin protocol and the technology underlying digital currencies in general, and bitcoin as a currency. According to him, cryptocurrency will never be accepted as legal tender due to government monopolies on taxes.
He describes how all entities in a state have to pay taxes, thus requiring all banks to be able to clear their payments with the government’s bank, which is often the central bank. Because the central bank will only accept legal tender, though, cryptocurrency will not be accepted, and the government has no reason to classify it as legal tender.
“No matter how acceptable bitcoins are amongst its enthusiasts, it can in no way impact the ability of the government to conduct monetary policy because everyone at the end of the day has to pay their taxes and must obtain central bank liabilities to clear with the central bank.”
The OECD paper goes into detail on the risks associated with bitcoin and anonymous fund transfers. Among these are tax evasion, money laundering and the lack of consumer protection.
Blundell-Wignall paints a picture of how a government could intervene heavily in the bitcoin system if it were used for illegal activities with the example of the abandonment of the gold standard in the 1930s. The US government then used its “plenary power” to cancel all gold clauses in public and private contracts, freeing itself from the gold standard.
Something similar could happen with bitcoin, Blundell-Wignall argues:
“If bitcoins begin to undermine the financial and tax systems they will be shut down and all contracts between traders would be unenforceable.”
About the OECD
The OECD’s working papers do not represent the official views of the organisation. Instead, they are research works in progress that represent the opinions of the authors.
Working papers are designed to “stimulate discussion” on the range of issues that fall within the OECD’s remit, according to the organisation’s literature. Working papers are also open to comments. The bitcoin paper is part of the OECD’s series of working papers on finance, insurance and private pensions.
The OECD is an international organisation headquartered in Paris. It was established in 1948, as the Organisation for European Economic Cooperation, to administer the Marshall Plan for the reconstruction of Europe following the second world war.
Today, it is an influential policy research organisation that advises the governments of its 34 member states on economic and social policies.
Featured image via OECD