As bitcoin — an alternative global currency — breaks another new record with a serious jump in value this week to cross $US8,300, one of the world’s biggest banks has spelled out why it won’t work.
Paris-based BNP Paribas has gone beyond the usual arguments about crime, security and tax evasion to pinpoint why bitcoin can’t fulfil the promise at the heart of its success — to offer consumers an alternative means of exchange to banks and currencies as we know them.
The French Bank is reacting to the growing acceptance of bitcoin and other crypto-currencies around the world. In Japan, bitcoin has been accepted as “a legitimate method of payment,” while in the US, the Chicago Mercantile Exchange is planning to trade bitcoin futures.
Here’s the main flaws from BNP Paribas:
1. It offers no lender of last resort — Every shaky European bank would certainly understand quickly the importance of this function in a currency. If there is a crisis, bitcoin has no well-funded regulator to step in and cover losses. BNP says in that scenario consumers would rush to find real cash which could in turn create a run on banks, the biggest nightmare in the financial system.
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2. Deflation — Though speculators love that there is only a finite number of bitcoins, this means you have the opposite of inflation as a looming problem. With just 16.7 million bitcoins in circulation, the risk of inflation is eliminated but deflation, already an issue in global trade, could cause a range of problems in the future.
3. Unreliable exchange of value — Bitcoin’s wildly fluctuating share price is perfect for traders but hell for consumers if they wish to use it in any significant fashion.
4. No profits for central banks — If bitcoin genuinely starts to replace cash as we know it central banks will lose a key source of income called seigniorage, which is the profit they get from printing money. No government will want to subsidise central banks which have lost a revenue source.
In short, BNP Paribas infers bitcoin could undermine the global monetary system as we know it. On that basis that bank suggests a global co-ordinated move to regulate bitcoin is on the cards.
In Sydney, AMP chief economist Shane Oliver has also been looking at the issue. Usefully, Oliver says he does not fully understand bitcoin (who really does?) and though he worries it is a bubble he also says there is every chance the value of bitcoin may keep going up for some time.
Intriguingly, Oliver also floats the idea that bitcoin and its crypto-currency variants may survive — or at least the blockchain technology behind them may survive. But Oliver believes the cryptocurrencies of the future will be official just like the legal tender of notes and coins of today.
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