As Australia’s banks step up efforts to understand cryptocurrencies like Bitcoin, the UK’s central bank is questioning whether a variant of the blockchain technology that underpins it could one day power a central bank-issued digital currency.
Bank of England chief economist Andrew Haldane said in a recent speech that bitcoin’s potential as a central currency was being explored as part of the bank’s research agenda.
“In one sense, there is nothing new about digital, state-issued money. Bank deposits at the central bank are precisely that,” Haldane said.
“In its short life, bitcoin has emerged as a monetary enigma. It divides opinion like nothing else.
“[But] what I think is now reasonably clear is that the distributed payment technology embodied in bitcoin has real potential.”
That technology is the blockchain – which is effectively a verified ledger of all bitcoin transactions.
“On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network,” Haldane said.
“Bitcoin’s ‘blockchain’ technology appears to offer an imaginative solution to that distributed trust problem.
"Whether a variant of this technology could support central bank-issued digital currency is very much an open question. So too is whether the public would accept it as a substitute for paper currency.
“Central bank-issued digital currency raises big logistical and behavioural questions too. How practically would it work? What security and privacy risks would it raise? And how would public and privately-issued monies interact?
“These questions do not have easy answers.”
Haldane’s examination of blockchain technology comes just months after former Bitcoin Foundation executive director John Matonis told Australian Banking & Finance the technology would be a “real challenger to the central banks”.
“It offers an alternative to their monetary monopoly over issuing money. And it allows for the private dissemination of currency,” the article quotes Matonis as saying.
Australia’s central bank, the Reserve Bank of Australia (RBA), is presently steering clear of a potential embrace of bitcoin or blockchain technology.
“Digital currencies raise some potential policy issues for the Reserve Bank in the areas of the payments system, monetary policy and financial stability,” the RBA noted in a Senate submission last year.
“Given the very limited use and acceptance of digital currencies in Australia, it is not apparent that these issues currently warrant action by the bank.”
But away from the central bank, Australia’s big four banks are taking far more notice of bitcoin and the blockchain.
CBA has joined forces with eight other major international banks and a fintech firm to “create a framework for using blockchain technology in the markets”, Reuters reported last month.
Westpac, meanwhile, recently closed accounts held by bitcoin companies. The bank said it had to do so to satisfy tough anti-money laundering and counter-terrorism laws.
Information Age reported in June about the general trend by Australia’s banks to understand bitcoin and cryptocurrencies generally.
It followed investments by Westpac in a digital wallet service and trials of the open source currency exchange Ripple by Westpac and CBA.