We're here in this café in East London next to this Bitcoin ATM. What is Bitcoin and what
can I get from this ATM? Sure, Dan. So, Bitcoin is an Internet-based
currency and payment system. It was designed to remove any need for a third party, such
as a bank, when making payments either online or, since we're in a café, for a coffee.
And no central bank, including the Bank of England, is involved in its creation. Now,
there have been several hundred digital currencies set up over the last few years, but the first
of these was Bitcoin and it remains the largest today.
This machine lets you buy and sell bitcoins in return for banknotes.
You called Bitcoin a currency. Does that mean it's a type of money, then?
That's actually a tough question. Most money these days is an IOU, a promise to pay, but
Bitcoin is not backed up by any assets. So to that extent, it's
perhaps more like a digital commodity.
Economists define money by the role that it plays in society. And in particular, we look
at the extent to which it serves as a store of value, as a medium of exchange, and whether
it's used to price a great many goods and services. Now, Bitcoin plays these roles to
some extent, at least for some people, but not generally all of them.
How many people actually use bitcoins?
Most of them, yes. The price of bitcoins has risen quite a lot over the last few years,
which has got a lot of attention. There have also been quite sudden and sizable swings
in the price of bitcoins, though. There have been several occasions when the price has
fallen by more than 10 percent in a single day.
You also consider how some of the economics of
digital currencies might play out in the long run.
That's right. Now, one of the aspects that's been driving interest in digital currencies
is that the transaction fees involved are quite low, particularly for making payments
overseas or for low value payments. In the article, we look at whether these low fees
are sustainable in the long run.
I see.
Now, the underlying cost of processing a transaction in a digital currency, a process called "mining",
is actually higher than that for a normal card payment, for example, and there are
good reasons to believe that the cost of mining is going to continue to rise over time.
Since digital currencies, including Bitcoin, operate without any central authority, they need people,
miners, to check that the transactions are valid. Now, these miners receive transaction
fees from the transactions they check, but they also receive newly created bitcoins
as a reward for the verification process.
So as long as these miners continue receiving
newly created bitcoins as a reward for the transaction they verify,
the fees associated with using Bitcoin might be expected to remain low?
Well, here's the important point. Most of these schemes, including Bitcoin, are designed
to have a fixed eventual supply, so this reward can't last forever. And once that point is
reached, the fees will have to reflect the underlying cost of providing the service.
Now, your article also discusses what all of this means for the Bank of England.
That's right. The Bank has a responsibility for maintaining the monetary and financial
stability of the United Kingdom. At present, especially given their small size, digital
currencies do not pose a material threat to either of those objectives.
Could digital currencies pose a risk to the stability of the financial system in the future?
In theory they could, but only if they obtained widespread usage first.
For example, if households, businesses, or the financial sector were to be sufficiently
exposed to digital currencies and their prices would arise far enough, then a subsequent
price crash might have ripple effects for stability in the financial system. But there
would need to be a significant increase in the usage of these schemes for this risk,
or the others that we discuss in the article, to materialise.
And on the monetary side?
So long as prices continue to be quoted in pounds and pence, and so long as people only
use digital currencies alongside traditional sterling-based means of making payment, then
the Bank's ability to deliver price stability, as defined by the 2 percent target for CPI
inflation, isn't likely to be affected. The Bank of England will continue to monitor
any development in payment technologies or alternative currencies that have the potential
to affect its ability to achieve its objectives for monetary or financial stability.
That's great. John, thanks very much.
No worries.