Bitcoin has already been consigned to novelty status by high-powered central banks and governments.
The virtual currency and other cryptocurrencies are looked upon as novelties and fads by the powers-that-be.
Liberal do-gooders who propound the right of individuals to set up their own currency and stay outside the realms of the state are tolerated but will never win legal tender status for their cryptocurrency of choice, says economic expert Adrian Blundell-Wignall, writing for the Organisation of Economic Cooperation and Development (OECD).
Blundell-Wignall agrees cryptocurrencies that only exist in the virtual world could act as disruptive technology for financial intermediaries but can never replace currencies like the dollar and pound.
The reason why is simple, he writes in a blog for the OECD
Outside the banking system
“People putting forward a case to make Bitcoin and other similar cryptocurrencies don’t seem to fully understand how central banks work,” he said.
Blundell-Wignall explained that for the banking system to work they must be backed with reserves at a bank that backs their value.
For instance, he gives trading in fine wines as an example that is no different from trading in Bitcoin.
“Trading Bitcoin and trading bottles of fine wine do not affect the value of dollars however supply and demand may change the price of the commodity,” he said.
“Their prices may go up and down against the dollar, but these fluctuations will never affect interest rates or economic policy. A central bank controls monetary policy because they hold the cash.”
In effect, Bitcoin can never become legal tender unless a central bank holds cash reserves to underwrite the value of the currency in circulation.
“The problem is people are confusing currency with legal tender,” he wrote. “People have the freedom to exchange payment in any way they want and a Bitcoin is a token of payment, but somewhere along the line, someone has to convert that token into legal tender to give it value.
“No regulation is great for those who have a reason to mask their financial dealings through a Bitcoin exchange, but eventually that Bitcoin trader will have to convert the token to legal tender to pay a bill.”
He also argues that although no official monitoring systems are in place for Bitcoin, at some time a regulatory system should be put in place to ensure fair play for everyone involved in the currency.