Bitcoin and the Future of Central Banks

Author: Cleopatra Image source: Dazhi

If you bought $1 of Bitcoin in July 2010 and sold it in November 2013, you would have a balance of $2,500 in your wallet. Bitcoin made headlines around the world when its value quintupled from $200 to $1,000 in the space of a month between October and November 2013, and although it is now down to $620, trading in this new electronic currency, dubbed the “currency of the future,” continues.

The decentralized cryptocurrency developed by Satoshi Nakamoto is seen as a major leap forward for our financial markets, as it offers businesses a whole new way of doing business because of its online utility. This electronic currency, which is not controlled by any central authority, offers a solution to the recent banking, global recession and euro crisis, but it is admittedly still in its infancy. But Bitcoin also has its risks: volatility and illegal market growth. However, it is just beginning to develop, and it will definitely become a universal currency in some online markets in the future; but Bitcoin will not have a big impact on our existing central banking system for some time to come. Central authorities play a pivotal role in operating and protecting currencies, implementing decisions to change supply and interest rates to control economic policies, and certifying the authenticity of currencies.

The US Federal Reserve, the Bank of England and the European Central Bank are a few examples of central banks. However, Bitcoin does not have a central authority, which is another way to manage transactions and ensure that no one can copy electronic transactions. Therefore, Bitcoin's inventors developed a system with public keys, where electronic certificates are used to verify account identities and maintain detailed information. This system is very effective in preventing fraud because the large network effectively prevents counterfeiting and the transparency means that all Bitcoin transactions can verify that the buyer's account has a balance. However, this transparency allows illegal markets to operate undetected around the world. Although these transactions are transparent, the identities of buyers and sellers are not clear. There are no accounts, email addresses or names associated with transactions, but only addresses and their matching public-private keys for each settlement; a person can have multiple addresses, which makes it more difficult to trace transactions back to specific users.

The main advantage of Bitcoin is its relevance to the electronic world we live in today, which provides online orders, money transfers and mobile applications. People usually use PayPal to make online purchases, but PayPal charges a fee for each transaction, which means that large transfers can be very expensive, with a fee of 3.4% of the total amount, and bank transfers can take several days. However, with Bitcoin, money is transferred directly between accounts, without any fees and can be transferred instantly, regardless of location or amount.

The fees for currency conversion are gone and the time and money required for exchange are eliminated. This is particularly beneficial in the current globalized market, where most products are imported. While Bitcoin is an evolution of money, even if it is a big step in the right direction towards a more efficient globalized market, it does not change our existing central banking system. The absence of central bank regulation means that the government cannot intervene to maintain policies, which may inadvertently damage the currency. Quantitative easing, the injection of cash supply, is an example of a policy that promotes economic growth but reduces the value of our currency. However, these policies make up our economy, and without this ability, our economy will collapse. Yes, Bitcoin may have prevented the Euro crisis, but without regulation the consequences would be much worse because of its high volatility; our GDP per capita would be halved the day Bitcoin collapsed.

So what does the rise of Bitcoin mean for the future of central banks? The answer is currently 'not much'; however, if regulated by a central authority, Bitcoin could transform the online marketplace and become "the complementary online currency of the future".