Central Banks Exploring Use of Digital Currencies?

As bitcoin and other cryptocurrencies continue to soar in popularity, many central bankers are now keenly debating whether to start issuing digital currency for the first time. In a report released last month, the Swedish Riksbank suggests that consumers would benefit from an e-currency that gives them access to “risk-free” central bank money. The “e-krona” would be issued by the central bank and represent a claim against the central bank, in the same way that a bank note does.

This is an interesting development in the journey of cryptocurrencies which have typically been viewed as a threat to central banks and traditional financial institutions. As bitcoin is not generated by a central authority and is used in peer-to-peer transactions, it removes the role of central banks and represents a more democratic payment system.

Bitcoin Safe from Manipulation

Unlike the traditional financial ledgers maintained by central banks and financial institutions, the bitcoin ledger (called the blockchain) is updated and maintained by each individual user and tracks and records all transactions. The benefits of this are many, including there being no gatekeeper fees or transaction costs and because the records are accessible to everyone, they cannot be manipulated. Recent scandals in FX markets such as the rigging of LIBOR have seen more and more people turning to Bitcoin and other cryptocurrencies as a protest against the traditional abuse of financial markets seen in the traditional currency space.

Bitcoin Protects Against Political Risk

Furthermore, as Bitcoin is not issued by central bank’s or controlled by governments it does not suffer the typical volatility induced by political risk that we see in traditional currencies. Given the increasingly unpredictable nature of political events as we have seen over the last two years, this makes Bitcoin an attractive prospect for anyone looking to protect their wealth from fluctuations linked to political events and indeed, geopolitical risks.