Crypto-currencies do not stand up as a new form of money says Mark Carney, Governor of the Bank of England, speaking on “The Future of Money“. That said, the underlying technologies and capabilities, have potential.
The long, charitable answer is that crypto-currencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing.
They are poor stores of value, an inefficient media of exchange and are virtually non-existent units of account.
Authorities need to decide whether to isolate, regulate or integrate crypto-assets and their associated activities.
This is probably the strongest statement on the subject so far from a Central Banker.
But, whatever the merits of crypto-currencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications.
The underlying technologies and capabilities, have potential, given the right regulatory frameworks.
Their core technology is already having an impact. Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better. Indeed, crypto-assets help point the way to the future of money in three respects:
Decentralised peer-to-peer interactions
Crypto-assets are part of a broader reorganisation of the economy and society into a series of distributed peer-to-peer connections across powerful networks.28 People are increasingly forming connections directly, instantaneously and openly, and this is revolutionising how they consume, work, and communicate.
Yet the financial system continues to be arranged around a series of hubs and spokes like banks and payments, clearing and settlement systems. Crypto-assets are an attempt to create the financial architecture for peer-to-peer transactions. Even if the current generation is not the answer, it is throwing down the gauntlet to the existing payment systems. These must now evolve to meet the demands of fully reliable, real-time, distributed transactions.
Underlying technologies offer to transform the efficiency, reliability and flexibility of payments.
The technologies underlying crypto-assets, particularly distributed ledger, can:
- Increase the efficiency of managing data;
- Improve resilience by eliminating central points of failure, as multiple parties will share replicated data and functionality;
- Enhance transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and
- Expand the use of straight-through processes, including with “smart contracts” that on receipt of new information, automatically update and if appropriate, pay.
These properties mean distributed ledger technology could transform everything from how people manage of their interactions with public agencies, including their tax and medical records, through to how businesses manage their supply chains.
A Central bank digital currency (CBDC) accessible to all.
Crypto-assets raise the obvious question about whether their infrastructure could be combined with the trust inherent in existing fiat currencies to create a central bank digital currency (CBDC).
Currently only banks can hold central bank money electronically in the form of a settlement account at the Bank of England. To be truly transformative a general purpose CBDC would open access to individuals and firms.
The Bank has an open mind about the eventual development of a CBDC and an active research programme dedicated to it. That said, given current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all, a true, widely available reliable CBDC does not appear to be a near-term prospect.
Moreover whether it is desirable depends on the answers to a series of big policy questions. While these are largely for another speech, I will note that a general purpose CBDC could mean a much greater role for central banks in the financial system. Central banks may find themselves disintermediating commercial banks in normal times and running the risk of destabilising flights to quality in times of stress.
There are also broader societal questions (that others would need to answer) such as how society balances privacy rights with the extent to which the information in a CBDC could be used to fight terrorism and economic crime.
