Don't be afraid of bitcoin
Elastic money is key to price stability
by Mojmír Hampl in Prague
Mon 31 Jul 2017
Prague is home to a strong community of cryptocurrency supporters and users. The city even has a café where customers can pay only in bitcoin. Many users of digital currency see it as a viable alternative to the current monetary system. They even question whether institutions such as the Czech National Bank should be afraid of bitcoin and other independent currencies, and of their power to marginalise traditional money.
There really is no reason for banks to fear them. All of the alternative currencies are negligible in terms of size and scope: electronic transactions using bitcoin worldwide amount to only 16% of the electronic transactions conducted in the Czech koruna, a currency used by just 10.5m people.
A more fundamental issue is bitcoin's constantly changing purchasing power. Money is a means for paying and settling transactions, a unit of account and a store of value. Swift changes in purchasing power are the enemy of any good currency. If a currency is losing value, people want to get rid of it quickly. In contrast, if it is gaining value, they hoard it.
The key principle of bitcoin is that its supply will be fixed, which makes it inherently volatile. This is the antithesis of our elastic money system, which is based on the principle that to keep the purchasing power of money relatively constant the amount of money has to change flexibly over time. The monetary policy lesson of the late 19th and 20th centuries is that price stability matters. People may take it for granted but this is the most beneficial feature of money in its present form and the monetary policy behind it. People can use a currency and not even think about why they trust it.
Central bankers have failed to explain that one of the key reasons for their actions during and after the 2008 financial crisis was to maintain price stability. This sometimes required unorthodox policies.
People tend to be concerned about too much money being 'created', but they typically have little idea about the size of the money supply. When I ask well-educated audiences, I often get wildly wrong estimates for the money supply but fairly precise ones for the inflation rate. Price stability, not money supply, matters.
As long as central bankers abide by this principle, there is no reason to fear that our existing monetary system will be replaced by a fixed-money alternative.
Mojmír Hampl is Vice-Governor of the Czech National Bank.
OMFIF Focus on fintech
In recognition of the growing importance of financial technology, OMFIF is running a 'Focus on fintech' series. It aims to provide expert analysis of developments in areas including cybersecurity, digital currencies, decentralised ledger technology, big data, regulation and financial inclusion. The series will take the form of podcasts, telephone briefings, commentaries and meetings. Register to receive updates.
Mojmír Hampl took part in the second OMFIF fintech podcast on central banks and digital currencies. The discussion examined the issues surrounding the development of central bank digital currencies, including the potential risks and benefits for the global financial system. Listen to the podcast.
In the first of the fintech podcasts, Hiromi Yamaoka, director general of the payments and settlements systems department at the Bank of Japan, also discussed digital currencies as well as the use of decentralised leger technology for clearing and settling payments. Listen to the podcast.
OMFIF is organising a series of roundtable discussions in London, which focus on central banks and digital currencies. The series is intended to examine the way central banks around the world, as well as their private market counterparts, are approaching the development of digital currencies and DLT. The purpose is to provide an interactive forum to examine research, best practices and the potential for global standards, as well as the relevant risks and benefits. For details of meetings, click here.
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