Think of currency as a river flowing through the economy. It lubricates transactions between buyers and sellers, passing through banks and financial companies. Governments regulate its flow, sometimes squeezing supply, sometimes adding to the flow by printing money.
Digital currencies seek to bypass the gatekeepers of governments and banks. They often exist beyond the control of any state. And in a globalised world, they have a utopian appeal: the ability to send and receive money to anyone in the world, without traditional oversight. Could they become a global currency?
Probably not, at least not in the way the most idealistic backers of currencies such as bitcoin (the best known, but there are others) believe. Digital currencies have much to recommend them: sellers like them because they cut out the banking middleman, lowering transaction costs. Buyers like them because they are anonymous.
But there are several obstacles to making digital currencies work more widely. One is confidentiality: bitcoin anonymises the identity of currency owners, which governments dislike because that could facilitate crime, a point illustrated by Friday’s cyber attack, when hackers demanded ransom payments using the digital currency. Another is volatility, where the price of the currency can fluctuate widely in mere hours. A third is liquidity: the total amount of bitcoins, for example, is fixed, meaning it isn’t easy to adjust how much currency is in circulation, which is an important part of the monetary policy of most governments.
To get around this, new digital currencies are being created. The technology that underpins bitcoin and similar digital currencies is already being adopted by businesses and governments. But the specifics will vary. The banking system and governments of nation states are not going anywhere, regardless of the utopian dreams of some currency innovators. As digital currencies develop, they will have to fit into the existing political and financial infrastructure. But within that system, there is considerable room to innovate and both governments and banks must do so. Digital currencies could drive innovation, but they won’t replace banks any time soon.
