Will digital currencies like Bitcoin become mainstream?
At the end of February the Bank of England published a research paper with an aim of kick-starting new thinking around banks.
One of the themes under consideration was entitled ‘Central Bank response to fundamental technological, institutional, societal and environmental change’. The interesting thing about this research, beyond its snappy titles, was the acceptance that digital currencies may have a role to play in mainstream finance, and may ultimately be something that central banks look to issue themselves. The research paper states ‘While existing private digital currencies have economic flaws which make them volatile, the distributed ledger technology that their payment systems rely on may have considerable promise.’
This promise extends so far as to the BoE speculating that digital currency ‘could be used as a new way of undertaking interbank settlement, or it could be made available to a wider range of banks and NBFIs [non-bank financial institutions. In principle, it might also be made available to non-financial firms and individuals generally, as banknotes are today.’ Such change firmly places the digital currencies into the mainstream of the finance world.
This research follows hot on the heels of the US Federal Reserve publishing its own research on digital currencies which it now feels are a more mature technology than they were when they looked at the emergence of Bitcoin in 2013 and which they now believe may become a part of future improvements to the US payments system.
And this is where things start to get interesting
One of the attractions for many of digital currencies such as Bitcoin is the very fact that they are not centrally controlled and that they operate outside of the established finance world. Bitcoin and its ilk were built as a reaction to the traditional organisations and centralised business models, and some would say that digital currencies start to do away with the need for central banks. If these central banks are now looking to adopt this technology the question arises as to what needs to change or whether the establishment can pick and choose the best bits from the new technology without changing their business practices and models? Only time will tell whether the financial establishment is able to adapt sufficiently in order to successfully adopt such technologically driven change or whether we will see two competing models in operation, coexisting but not complementing each other.
Technology forces to innovate
Personally, I’m in two minds about this. On the one hand I think the technology is far too useful to simply ignore and the ‘establishment’ will find ways to adopt it. Essentially the Fed and BoE (and others) have Bitcoin out in the wild doing their testing for them – at no cost or risk to themselves. In 2 years we’ve gone from ‘this is too unstable a technology and we don’t trust it’ to ‘well this is interesting and we can definitely see uses for it’. Give it another 2 years and I wouldn’t be surprised if this is being trialled by at least one of the major banks.
On the other hand the people that created the crypto currencies did so because they don’t trust the banks, and so are likely to react to whatever becomes mainstream. I honestly think that Bitcoin opened a door to ‘peoples finance’, the ability for average people to be able to operate in the financial world without the need for banks. In fact this that raises whole other raft of ideas tying in with peer-to-peer lending and crowd funding….