The Bank of England Is Impressed With Bitcoin's Block Chain
But it's not worried about digital currencies just yet.
The Bank of England. Image: Flickr/Bank of England
The Bank of England, the UK's central bank and the institution responsible for keeping the country financially stable, has released a couple of reports on Bitcoin and other digital currencies. What seems to have grabbed their attention most is the very thing that undermines the idea of a centralised banking system: the block chain.
"Although the monetary aspects of digital currencies have attracted considerable attention, the distributed ledger underlying their payment systems is a significant innovation," one of the reports states under the title, "The key innovation."
This block chain ledger is what lies at the heart of Bitcoin: It's the list of every transaction made using the currency, which rather than being housed on a server somewhere and owned by one individual, company, or bank, is spread across the computers of those participating in the Bitcoin network.
With this ledger in place, no authority is required to stand guard and check that coins are only being spent once—the network does that, which means, to use the wording of the report, that the system can operate "without intermediaries such as banks."
The report goes on to say that this decentralised approach could have ramifications for finance all over, especially considering that today we're already used to trading in bits rather than cold, hard cash. "As with money held as bank deposits, most financial assets today exist as purely digital records," it states. "This opens up the possibility for distributed ledgers to transform the financial system more generally."
And of course, the block chain could have applications outside of finance too. In a previous interview with me, Dark Wallet programmer Amir Taaki said that, for him, one of the best things about the block chain is that it could escape all overarching institutions. He told me it could "enable people to work on a large scale without needing the courts, judges, police, bureaucrats, politicians and all the big buildings. We can do better; for the people, by the people."
This interest in Bitcoin from a financial body as powerful and established as the Bank of England is likely to antagonise some of those who see the digital currency as a way precisely to avoid them.
But the central bank's praise should only really be read as an intellectual analysis of the system. Despite its recgonition of the block chain as an innovative force, the report doesn't exactly call for banks to drop everything and start dishing out cryptocurrencies.
"It is estimated that there is less than £60 million worth of bitcoins circulating within the UK economy."
One of the reports opens with a bit of a reality check, noting that, "Although digital currencies could, in theory, serve as money for anybody with an internet-enabled device, at present they act as money only to a limited extent and only for relatively few people."
Although Bitcoin wallets are becoming more accessible to normal consumers via iPhone apps, and getting your hands on some of the currency is now relatively easy thanks to a scattering of ATMs, Bitcoin is still only used by a tiny minority.
While the Bank of England report stresses the difficulty of figuring out how many people use Bitcoin, it suggests a figure of around 20,000 people in the UK that have "any significant holding of bitcoins," with an estimate of only about 300 transactions in the country per day.
"It is estimated that there is less than £60 million ($97.5 million) worth of bitcoins circulating within the UK economy, which represents less than 0.1 percent of sterling notes and coin and only 0.003 percent of broad money balances," the report adds.
Bearing this relative unpopularity in mind, "Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom," one of the reports notes.
This could change in the more distant future, but only if cryptocurrencies grow a lot, and it doesn't sound like the Bank is quaking in its boots right now. "The Bank continues to monitor digital currencies and the risks they pose to its mission," however.