Monday 15th September, 2014

According to the Bank of England, digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom, given the small size of such schemes. It is estimated that there are less than £60 million worth of bitcoins circulating within the UK economy, representing 0.1% of sterling notes.

The Bank of England Quarterly Bulletin article argues that the key innovation of digital currencies is the ‘distributed ledger’ technology that allows a payment system to operate in an entirely decentralised way, with no intermediaries such as banks. This innovation which uses a range of disciplines such as cryptography, game theory and peer-to-peer networking, represents a fundamental change in how payment systems can be made to work.

Another article 'The economics of digital currencies’ included in the bulletin looks at to what extent could digital currencies be considered as money. While digital currencies could, in theory, serve as money for anybody with an internet-enabled device, at present they serve the roles of money only to a limited extent and only for relatively few people (20,000 people approx. in the UK currently hold bitcoins).

"At a microeconomic level, a key attraction of some digital currency schemes at present is their low transaction fees.  But the incentives embedded in the current design of digital currencies mean that these fees may eventually need to rise significantly, as usage grows."

"At a macroeconomic level, most digital currencies, as currently designed, incorporate a predetermined path towards a fixed eventual supply – a feature which, in a purely hypothetical scenario in which the digital currency were used as the predominant form of money, would likely cause greater volatility in prices and real activity due to the inability of the money supply to vary in response to aggregate demand."

However, both digital currencies’ status as money and the distributed ledger technology used by them have potential to develop over time.