The Bank of England is compiling a report that may lead to it issuing its own cryptocurrency that would cut out the need for high street banks.
While Bitcoin and its cryptocurrency cousins sizzled in 2017, the new year should continue to see a lot of crypto action. An interesting development in the coming year concerns the Bank of England (BoE). The bank’s research unit has been studying virtual currencies since 2015, and the bank is now working on a report that could lead to the bank issuing its own cryptocurrency.
Cryptocurrency Based Upon the Value of Sterling
There’s no doubt that banks and Bitcoin don’t have the best relationship. This is understandable as banks rely upon central regulation and control while cryptocurrency features decentralized, peer-to-peer economic transactions. Poland’s central bank recently told citizens that cryptocurrency is “not money” in order to discourage the use of cryptocurrency.
Of course, banks do realize the potential that crypto’s underlying blockchain technology has to offer, and they want to take full advantage. Plus, they would love to cut out virtual currencies altogether and replace it with something they can control. The Bank of England is expected to release a report this year that could lead the bank to issue its own cryptocurrency, which would be tied to the value of sterling for its worth.
The Drawback of Bank-Issued Cryptocurrency
According to bank governor Mark Carney, there is a potential fly in the soup when it comes to the Bank of England creating and releasing its own cryptocurrency. Central banks currently use electronic payments, but such exchanges are handled in a centralized fashion and across accounts at the central bank.
The trouble is that bank-issued cryptocurrency would allow people to skip the central intermediary and make instant payments to whomever they choose. The shared ledger of the blockchain would enable people to open accounts at any bank, at any time, and move their accounts if need be.
This open, instantaneous movement between banks with no central intermediary could have a major repercussion, which Carney noted by saying:
You (could) create a situation where you can have an instantaneous (bank) run. So as soon as there were any concern, people can switch in their account at the Bank of England.
Carney went on to say that such a run could cause the BoE to gain a huge amount of deposits that it would then need to invest into different assets. He added:
There are many talents of the Bank of England, but I think credit allocation across the entire economy would not be a good idea. So there are some fundamental problems if you push the retail design all the way down, unless you restrict the amount that people have.
It is an interesting conundrum. A bank-issued cryptocurrency by the central bank could negate the need for high street banks, which are large banks that feature many locations. As many people are now using debit cards and making payments by using their smart phones, it’s likely most banks will eventually start cutting back on the number of physical locations. It’s the possibility of a run that has banks worried. It’ll be interesting to see if they come up some kind of mechanism to mitigate that possibility.
Do you think the Bank of England will issue its own cryptocurrency? Will banks muck up the current decentralized, P2P system crypto already has in place? Let us know what you think in the comments below.
Images courtesy of Wikimedia Commons, Pixabay, and Bitcoinist archives.
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