Digital currencies pose threat

Image thanks to The Guardian

‘Digital currencies pose threat to economy, warns Bank of England’. So said the Guardian. Every day there is some story in the press about cryptocurrencies. Reports of their demise is somewhat premature yet there is always opinion to be had that they will imminently go bust, soar in value, undermine the western economic system or spark an unstoppable crime wave. No doubt the Daily Mail has a view on how they will affect house prices, not that I will ever know.

Of course, at this stage nobody knows. The only thing that we can be certain of is that they may or may not be here for much longer and in the meantime their price will go up, down or stay the same. In other words we know just as much as the person next to you.

Anyway, back to the article. According to the Bank of England, ‘The rise of digital currencies could lead to a flood of withdrawals from high-street banks, risking financial stability and the wider economy.’ It’s answer is to think about introducing so-called stablecoins, cryptocurrencies that are pegged to the value of a traditional currency.

It is missing the point. We already have digital currencies linked to traditional currencies. They are called money. Today, the vast majority of my spending is done electronically. I suspect it is in the high ninety per cent and I am no different from most other people.  In effect I trade electronically and a pegged cryptocurrency would not offer me anything different to an electric Pound, Dollar or Yen.

Cryptocurrencies are only of interest because they are not pegged to a fiat currency. They have the potential to be free from government intervention, truly free from anything other than the market. Their value will be determined entirely by the price that people are willing to pay. 

This is what government’s don’t like and they are doing their utmost to undermine them. Some countries have gone as far as trying to ban them. A government can’t devalue an unpegged currency. It can’t make more coins when it needs more money. 

I said that the Bank of England is missing the point, though I doubt it is. Through it’s press releases and supportive media it is hoping that we do.

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