Bitcoin keeps central bankers on edge

Bitcoin is up 45 per cent in the past two weeks. It took the S&P 500 since February 2014 to achieve a similar increase.

Central bankers say the success of Bitcoin and other cryptocurrencies is just a bubble. But it keeps them awake at night because these private currencies threaten their control of the banking system and money supply, which could undermine the monetary policies they use to manage inflation.

With Bitcoin smashing through the $8,000 level for the first time last week and blowing past $9,500 this week, they are also worried they will be blamed if the market crashes.

This is why several central banks are advocating regulations to impose control. Others are even looking at whether to introduce their own digital currency and are testing payment platforms.

"The problem with Bitcoin is that it could easily blow up and central banks could then be accused of not doing anything," European Central Bank policymaker Ewald Nowotny told Reuters.

"So, we're trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated."

The global cryptocurrency market is worth $245 billion which is tiny compared to the trillion dollar plus balance sheets of the Bank of Japan, the US Federal Reserve or the ECB.

These institutions issue yen, US dollars and euros, both by creating physical cash or by crediting banks' accounts, as is the case with their bond-buying programmes.

Cryptocurrencies, however, are not centralised. They do not pass through regulated banks and traditional payment systems. Instead, they often use Blockchain, an online ledger of transactions that is maintained by a network of anonymous computers on the Internet.

This has raised concerns about their vulnerability to hackers, as underlined by a score of incidents in recent months, and their use to finance crime.
Cryptocurrencies holders also have a claim on a private, rather than a public entity, which could go bust or stop functioning.

For these reasons, and given their low adoption by retailers, central banks have dismissed cryptocurrencies as risky commodities with no bearing on the real economy.

"Bitcoin is a sort of tulip," ECB vice-president Vitor Constancio said in September, comparing it to the Dutch 17th century trading bubble. "It's an instrument of speculation." - Reuters