Future Forum | Bank of England

Digital currencies and cryptoassets

Future Forum
Future Forum | 3 months ago | in Bank to the future

A digital currency is an asset that only exists electronically. Digital currencies such as Bitcoin were designed to be used to make payments, but today many digital currencies are held as speculative assets by investors who hope their value will rise.

The Bank is carrying out research into digital currencies and the technology that supports them, you can find more information on our website: https://www.bankofengland.co.uk/research/digital-currencies

What are cryptoassets?

There are thousands of different types of cryptoassets out there – or as you might know them, cryptocurrencies. You’ve probably heard of a few – Bitcoin, Ripple, Litecoin and Ethereum have all been mentioned in the news recently. But what exactly is it?

Well, let’s start by breaking down the word ‘cryptocurrency’. The first part of the word, ‘crypto’, means ‘hidden’ or ‘secret’ reflecting the secure technology used to record who owns what, and for making payments between users.

The second part of the word, ‘currency,’ tells us the reason cryptocurrencies were designed in the first place: a type of electronic cash.

But cryptocurrencies aren’t like the cash we carry. They exist electronically and use a peer-to-peer system. There is no central bank or government to manage the system or step in if something goes wrong.

Some people find this appealing because they think they have more control over their funds but in reality, there are significant risks. With no banks or central authority protecting you, if your funds are stolen, no one is responsible for helping you get your money back.



JoshuaB 3 months ago

"But cryptocurrencies aren’t like the cash we carry. They exist electronically and use a peer-to-peer system. There is no central bank or government to manage the system or step in if something goes wrong."

One point to consider is that only because something is called a "cryptocurrency", it does not make it inherently peer-to-peer or decentralised or censorship resistant. The vast majority of cryptocurrencies do not possess these attributes, in fact, or lack critical safety features (low amount of hashing power, making it susceptible to attacks, lack of code review, low amount of verifying nodes etc etc).

Furthermore, many of these cryptocurrencies (which includes Ripple, f.ex, and also EOS, which are depicted in the article's graphic) have a centralised entity issuing these tokens, or which are in control of verification mechanisms (making the token in question governed by a central authority).

Shelley (BoE Moderator) 3 months ago

Thank you for your comment Joshua - I think this really adds value to this discussion point. I'd be interested to hear others views too.

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Ramblingsofabard 3 months ago

I would like to know if anyone has an example where a cryptocurrency (in any of its forms) has provided a service that internet banking and p2p services using “traditional” money was unable to provide? Bitcoin (and others) have helped create a lot of hype around cryptocurrencies but yet to see the value. Even from a decentralisation point of view and user privacy, it’s unclear how there will be a benefit from introducing such currency as mainstream.

JoshuaB 3 months ago

For the average person in the Western world with access to a functioning banking system, bitcoin does not provide a lot of use cases as a replacement in the day-to-day use of governmental fiat money.

However, there are several usecase examples where bitcoin is superior to fiat money, or has at least a complementary function in regards to governmental monies.

1. despite its price volatility, bitcoin is an interesting asset which can help hedging against inflation and mismanagement of fiat money by the government, as well as it being uncorrelated with the bond/stock market. Adding to it properties like censorship resistance and unconfiscatability (assuming a proper storage method), it can serve as a (partial) store of value.

2. bitcoin allows cross-border payments which don't rely on conventional payment gateways (f.ex Iran was just yesterday cut off from the SWIFT system). This is used by many people for remittances into their resp. home countries, saving on currency exchange fees, long delay times etc.

3. micropayments (sub-cent amounts) are not possible with common monies. Such kinds of payments will be increasingly important in our digital age (paying for streaming services by minute/second, f.ex).

4. it serves an important function when anonymity (at least partially) is desired. Of course, usually illegal things come to mind, but this can also be donating to human rights charities in a totalitarian jurisdictions, which are surveilled/persecuted by local authorities.

This is just an excerpt of usecases that are not possible with our current "internet banking and p2p services".

Again, the average person in the UK probably would not be someone dealing with such usecases, and I agree that "cryptocurrency" as a whole has a lot of hype in it, but it also serves some important use cases.

Also consider that around 2 billion people worldwide have no access to a functioning financial system at all.

Shelley (BoE Moderator) 3 months ago

Thank you for your comments.

Ramblingsofabard 3 months ago

Thank you for sharing. I was looking from a UK point of view, where financial inclusion is less of an issue. But totally agree the benefits it provides in some parts of the world, with less developed infrastructure. However, I don’t think the first two points you make hold true in all cases. A volatile base currency has a lot of implications for users, as they plan their consumption smoothing. This would complicate the life of the MPC significantly. Similarly, movements in the value of a currency based on the stock/bond market are more of a reflection of the economic vitality than pure speculation. You would want the currency to move with the economy. The speed of processing payments through bitcoin (or other cryptocurrencies) is quite debatable - depends whose estimates you read.

JoshuaB 3 months ago

I agree that financial inclusion is less relevant for an average UK resident. I got a little carried away with the usecases while typing :)

Could you please explain MPC? I'm not familiar with the abbreviation (quick google didn't help either), so that part is not clear to me. Thanks!

Ramblingsofabard 3 months ago

I was referring to the Monetary Policy Committee of the BoE

View all replies (5)

Cornersafe 3 months ago

I do wonder what the impact of digital currency is on the money supply which in the past has been a key part of monetary policy. It would seem that if money is moving around the globe in digital form, we would have much less control. It was interesting in Australia where certain places have installed Bitcoin ATMs and you can buy your coffee with it via an app as easy as swiping a card.

Adrian Cole 2 months ago

I've been studying cryptocurrency (Bitcoin and others) since 2012 and while there is no successful central bank issued crypto currency yet (closest is perhaps the dubious Petro in Venezuela), there is a cryptocurrency version of the US dollar, in fact a few versions now available - this (USDC) being one of the most credible. (the 2 minute video in the blog post below is well worth watching)


The USDC It has many (but not all) of the features of Bitcoin so it remains to be seen if this will be used widely as it fixes one crucial problem that bitcoin suffers, that being volatility. 1 USDC is equal to $1USD.

For now its used mainly as liquidity between crypto currency exchanges, but the uses could be much wider indeed - this is programmable money.

Are the BoE aware and are they watching with interest - they should !

Shelley (BoE Moderator) 2 months ago

Thank you for sharing Adrain.

Amy Buckingham 2 months ago

This idea has been advanced to the next phase

june gibson 2 months ago

I saw last week that the FCA are looking into regulating cryptocurrencies. I think they left it a bit late. It was obvious to me that it was a perfect method of hiding funds by those up to no good - i.e. cheating the UK Exchequer out of funds it so desperately needs.
Do you think regulatory action is late in the day?

Shelley (BoE Moderator) 2 months ago

Good question!
My personal point of view is that it is hard for regulators to stay 'up with the times'. You never know how big or how quick change is adopted, take PSD2 and Open banking from january this year, but it is felt that there has not been a big uptake for this - therefore were regulators and banks overprepared for this? I'd be interested to see others thoughts on your question.

Amy Buckingham 1 month ago

This idea has been advanced to the current phase