How do central banks perceive bitcoin and alternative international payment system?

The precise clarities of cryptocurrencies can be found with the aid of the Money Flower designed by some researchers of the Bank for International Settlements (BIS). The Money Flower categorises types of money with four characteristics: Namely, electronic mode, accessibility, legal tender by central bank and P-to-P standard (peer-to-peer).

What central banks could then also offer would be to issue an electronic currency which, in an extreme case scenario, would be accessible to anyone and whose accounts would be held directly by the central bank (refer above diagram: ‘Deposited currency accounts’). That way, however, the central bank would compete for deposits with commercial banks. These would have lower deposits than in the current system while they would have to offer higher interest rates on deposits than the central bank. This would limit their lending because the traditional money creation process would be disturbed. In order to offset the absence of money creation by commercial banks, the central bank would have to take on more securities and, thus, add more risks to its balance sheet. 

Moreover, the commercial banks’ deposit-taking business would probably be significantly more volatile. The reason is that as soon as signs of a (banking) crisis appeared, customers could quickly shift deposits from the relatively unsafe commercial banks to the safe central bank. A decline in deposit business would probably mean less business overall for commercial banks. Such a change would be radical and disruptive. The introduction of digital central bank money is therefore highly unlikely in the foreseeable future.

Not much remains of Bitcoin and the cryptocurrency idea – besides its character as an object of speculation. But the fact that cryptocurrencies are being used to process payments across currency areas shows that a need exists here.

At present, some 200,000 Bitcoin transactions are being performed every day. According to Internet data published by the relevant providers, PayPal processes around 25 million transactions per day, SWIFT about 30 million and Visa 150 million, but some of the processes taking place in these transactions are very dissimilar to those of Bitcoin. The number of possible Bitcoin transactions per second is often described as relatively limited, with the network being able to process a maximum of seven, and normally rather three or four. The second largest cryptocurrency, Ethereum, can handle twenty transactions per second, while PayPal can process around 200 and Visa as many as 56,000 per second, although the performance of the systems is not entirely comparable here either.

After all, international payment transactions between banks are exceptionally costly and also relatively slow. Bitcoin helps unmask this weakness, although payment systems such as PayPal also play a key role here. This competitive pressure should (continue to) bring about (long overdue) improvements to the existing systems, enabling international payments to be processed more cost-effectively and/or more quickly. Courtesy: KfW research

Currency Strength Index: FxWirePro's hourly BTC spot index is flashing at -55 (which is bearish), while hourly USD spot index was at -30 (mildly bearish) at 12:52 GMT.

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