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Who’s afraid of bitcoin?

All change: is the bitcoin revolution coming?

Should bitcoin become a major alternative to the dollar and the euro, the central banks would lose their power

10 November 2018

9:00 AM

10 November 2018

9:00 AM

An elaborate scam for ripping off gullible investors. A black-market currency for gun-runners, drug dealers, pimps and terrorists. A bubble that makes a 17th-century Dutch tulip look like a solid investment, and a drain on global energy. There are so many different ways the digital currency bitcoin is going to destroy the world it’s sometimes hard to keep track of them all. Everyone from Warren Buffett to Mark Carney has told us bitcoin is a serious threat to financial stability and any sane person should stay away.

True, there are plenty of reasons to be suspicious of bitcoin. It’s volatile, complicated and largely unregulated. But given the appetite that clearly exists for it (market capitalisation at the time of writing was £85.7 billion), isn’t it time we began to consider seriously what its long-term success would mean for the global economy? After all, if money  is fundamental to the way the world works, what happens when the very nature of money fundamentally changes?

In the ten years since it was created, bitcoin has had a seismic impact on the global financial system. From modest beginnings, it has grown into a major asset class and spawned a host of rival cryptocurrencies, such as litecoin and ethereum. Once the sole preserve of cyber-punk novels, cryptocurrencies have increasingly become an accepted part of the financial system. Most major banks have started to trade them in one way or another and they are accepted quite widely around the world. International legal systems have even begun to adapt to the new problems and opportunities they throw up. For example, both the Swiss canton of Zug and the American state of Wyoming have passed laws to encourage cryptocurrency trade. Wyoming has given cryptos a distinct legal status from cash, bonds or property, while Zug became the first government in the world to allow citizens to pay taxes in bitcoin. From the fringes, bitcoin, ahead of its cousin cryptos, has moved step by step into the mainstream.

Of course, it still has a very long way to go to seriously rival the dollar or the euro. Bitcoin is notoriously volatile. Last year its price raced all the way up to a high of £14,354 before collapsing all the way down to under £5,000. It has been more stable so far this year, but still it regularly moves 10 per cent or more in a week. It cannot become a genuine rival to cash while this remains the case, simply because volatility of this type encourages either manic spending or hoarding — in properly functioning economies, at least.

At the same time, regulators in the world’s pre–eminent financial centres have yet to approve cryptos, and the technology for mining and storing them is still relatively unproven. For these reasons, there are plenty of people who believe the whole market could still easily disappear overnight.

Obviously these are important caveats. But it’s worth remembering, too, that no new technology is ever created smoothly. Bitcoin is a decade old and has only had a couple of years in the mainstream. If it continues to grow at its current rate, if the regulators accept it, and if the technology underpinning it settles down, then perhaps it really could become the new global currency. After all, it makes sense for a digital, global economy to have a digital, global means of exchange. Should that happen, however, the changes it would set in train would be vast.

By definition, bitcoin’s success would break up the hegemony of the world’s central banks and national governments in terms of dictating fiscal policy. In fact, global adoption of bitcoin would make central banks as good as irrelevant. Right now, the Federal Reserve, the European Central Bank, the Bank of England and the rest of them are the only institutions that can print money. Sure, you can switch out of cash into other assets such as gold or property or shares, but for actual spending there is only one option. That gives those banks the power to set interest rates and to finance deficits or to run surpluses whenever they like. If bitcoin were to become a major alternative, with equal status to the dollar or the euro, central banks would lose those powers for ever. For better or worse, we would have effectively returned to a system much more like the Victorian gold standard.

The multinational corporate banks, too, would lose power. Right now, they control the processing of payments throughout the world. Companies can’t trade without putting money through a bank. But the blockchain technology that underpins bitcoin and the other cryptocurrencies is decentralised and open to everyone. Businesses and individuals can trade with one another using bitcoin without going through any form of financial institution at all. True, the banks have other services they provide. But it’s in the processing of money that their true strength lies. If that were to vanish, we could expect the likes of HSBC, BNP Paribas and Bank of America to gradually fade into insignificance. Put simply, we would have begun not to need them any more.

The successful widespread adoption of cryptocurrencies like bitcoin would also hugely speed up the process of globalisation: instead of national currencies, we would have a single means of exchange that could truly be used anywhere. Global trade has boomed over most of the post-war period as trade barriers and tariffs have gradually been dismantled. A triumph of digital currencies would catalyse this process by several orders of magnitude. Combine this with the ease of doing business across borders in the internet age and we would suddenly, inevitably, be close to the creation of a completely seamless global economy.

While it is sensible still to heed the warnings of the likes of Buffett and Carney, we must also acknowledge the possibility of bitcoin or another cryptocurrency achieving the kind of game-changing critical mass that sees its price quoted the world over alongside — or ahead of — the euro, dollar and yen. That day may be a long way off or much closer than we think. The only thing of which we can be certain is that if bitcoin truly succeeds, an awful lot of the fundamental building blocks upon which the world’s commercial systems are founded will have changed beyond all recognition.

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