Thursday 6th Feb 2020
Just a few short years ago, the idea of central banks - the Bank of England in particular - using anything other than the same fiat money they’ve always used, seemed completely improbable. But the rise of cryptocurrencies such as bitcoin has changed this significantly, and there are now considerations being made that could mean country-backed cryptocurrencies enter the market. The question is, could the UK be one of the first countries to develop and launch one?
What is a cryptocurrency?
Cryptocurrencies are digital, or ‘virtual’ currencies that work using cryptography, or secure communication techniques. Using technologies such as blockchain, cryptocurrency developers are able to create a currency that is so highly secure, that it’s nearly impossible to counterfeit. Part of this is down to the fact that the ledger that records how tokens are spent is stored and monitored across a huge network of computers. Information cannot easily be falsified. This decentralisation also means that cryptocurrencies cannot be controlled by one central entity such as a central bank.
Why might the UK start using cryptocurrencies?
We’ve already mentioned the security benefits of cryptocurrencies, but the potential benefits don’t end there. Due to the way that the virtual ledger works, transfers between individuals and businesses can be done very easily, and very securely. This reduces the need for payment intermediaries, making payment processing faster and cheaper. The idea behind introducing a UK cryptocurrency would then be a way of increasing security in many areas, and giving anonymity and control back to individuals.
However, there are negatives to crypto. While the main ledger that records blockchain information for a cryptocurrency is highly secure, some elements are less robust, such as a user’s own wallet. This could theoretically be hacked. In addition, as such currencies are based heavily on supply and demand, they can swing wildly in value. Finally, their reputation for use in illicit transactions is well known - because of the anonymity afforded.
Is such a change realistic?
There’s no doubt that this does all sound futuristic, and while there are benefits there are also drawbacks. But cryptocurrencies really are being given serious consideration. The World Economic Forum, which is one of the world’s most respected financial organisations, has published a toolkit to help central banks consider cryptocurrencies, and even launch them. While cybersecurity is one of the biggest concerns for central banks, many believe that cryptocurrencies could partly hold the answer, especially in a world where cash use is in decline. The Bank of England has agreed to meet representatives from other central banks in the near future to look at developing a central bank cryptocurrency, with the EU, Sweden, Japan, Canada and more all on board.
Sweden has already agreed a deal with a development company to pilot the e-krona cryptocurrency, and this could be seen as a watershed moment. If the trial platform goes well, and an agreement can be reached between central banks, state-backed cryptos could well be closer than you think.