The banks’ concerns about the future development of digital currencies and their influence on the financial industry.
Nowadays, banks can’t clearly define their position towards the cryptocurrency, whether it is better to adopt it or just ban it. Given the decentralized nature of bitcoin, the role of banks as intermediaries becomes unnecessary. Besides, taking into account the main advantages of digital currency, it becomes difficult for banks to compete with it.
There are a lot of people in the financial industry who criticize bitcoin. Benjamin Lawsky, superintendent of the US Department of Financial Services, once said in a statement: “If virtual currencies remain a virtual Wild West for narco-traffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise.”
In its recent report prepared by the Bank of England, the organization revealed its skepticism over the digital currencies. The bank questions whether any virtual currency, except bitcoin, is utilized today for making payments.
The reason why banks may not embrace the cryptocurrency in the future is that it is not widely used as a medium of exchange, instead, people consider bitcoin is a good as a store of value.
“Data suggest that digital currencies are primarily viewed as stores of value — albeit with significant volatility in their valuations — and are not typically used as media of exchange,” the report reads.
However, the bank admitted the potential of the bitcoin technology. “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.”
While bitcoin occupies the largest share of the digital currency market, in the financial world it still holds a small share. In comparison with 274 million world transfers realized in the European Union daily, transactions in bitcoin amount to just 69,000 per day.
In addition, the Bank of England pointed to the drawbacks of cryptocurrency, such as the lack of compensation rights in case of accidents or fraud. On the other hand, bitcoin has a number of benefits if compared with traditional money, including the high speed of payments, low cost and anonymity.
However, in view of the increased bitcoin’s volatility, the amount of people using it as an asset is likely to decrease within time. Although its price rose by 48% from January, bitcoin’s value is still 70% lower than it was at the same period last year.
The Bank of England has recently informed that it will likely create its own digital currency in the future. “A central bank-issued digital currency might be a more easily controlled means of settlement and exchange,” said the bank’s senior research advisor Michael Kumhof.
What concerns the future development of digital currency, increasing the government’s control will destroy its decentralized nature, which is the key feature attracting its users. It would be better for banks to wait and see how the digital currency will be developing in the years ahead.
Polina is an undergraduate student at Belarusian State Economic University (BSEU) where she is studying at the faculty of International Business Communication for a degree specializing in Intercultural Communication. In her spare time she enjoys drawing, music and travelling.
