Bubble or breakthrough? Bitcoin keeps central bankers on edge

Global Stock Markets

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 this week after a 50 percent climb in eight days, 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 global cryptocurrency market is worth $245 billion which is tiny compared to the trillion dollar plus balance sheets of the Bank of Japan, the U.S. Federal Reserve or the ECB.

These institutions issue yen, U.S. 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 centralized. 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.