The ECB Worries About Competition from Bitcoins

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Bitcoins – A Risk Factor for Central Banks' Reputations?

Here is another one from the 'you couldn't make this up' department (the ECB is a rich fount of those). The ECB is apparently worried that the digital currency bitcoins could ruin the reputation of central banks. Seriously. At least that is what they are saying:

According to Bloomberg:

“An increase in the value of bitcoin, the world’s largest online currency, may fuel concerns that virtual money could undermine the role of central banks.

The CHART OF THE DAY shows that bitcoin has more than doubled in the past 12 months, strengthening to $16.37 from $5.88, according to data from Mt. Gox, the world’s largest bitcoin exchange. The money, issued by a decentralized network of computers, has recovered after falling to $2.14 in November 2011 from a high of $29.58 five months earlier.

Greater demand for virtual currencies could have a negative impact on the reputation of central banks, according to a report published by the European Central Bank in October last year. Since the report was released, bitcoin has risen more than 55 percent against the dollar and use of the currency has surged.

Bitpay Inc., a bitcoin payment processing company that recently raised $510,000 in an investment round, this month announced that the number of companies using its services has increased almost 50 percent to more than 2,000 since November, when blog management firm WordPress.com said it would accept the digital currency.

“I think the ECB obviously is concerned, and it’s not reputational,” said Steve Hanke, a professor at Johns Hopkins University in Baltimore who helped to establish new currency regimes in countries such as Argentina and Bulgaria. “I think it’s a competitive threat. Maybe virtual currencies will be so convenient that they will pose a threat because of their ease of use.”

Virtual currencies “could have a negative impact on the reputation of central banks” if their use grows considerably, the Frankfurt-based ECB said in its research paper. “This risk should be considered when assessing the overall risk situation of central banks.”

(emphasis added)

Professor Hanke is of course 100% correct. It has absolutely nothing to do with the 'reputation' of central banks, it has everything to do with competition. Central banks are monopoly issuers of currency. Bitcoins threaten that monopoly, not least because the currency, although fully digital, is actually sounder than the confetti produced by central banks (and reportedly absolutely safe from counterfeiting as well). You read that right, it is a sounder currency, for the simple reason that the number of bitcoin units that can be created is strictly limited by the algorithm underlying the creation process.

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