Bitcoin, Britcoin and digital money

In recent years there has been great excitement about the creation of new digital “money”. However, consumers already have a form of electronic money.

| 5 min read

Anyone with a bank account uses electronic money. People accept payment of wages or pensions into their accounts, where the money exists only as an entry in a computer register. Much of that money is paid out by standing order or direct debit to suppliers by electronic transfer.

Many purchases a person now makes are made using another form of digital money, a credit or debit card. The electronic instruction transfers the cash from the account to the supplier of goods or services they wish to pay.

It is true that, for smaller transactions, many of us keep banknotes and coins in a purse or wallet and pay using cash. We could always draw more out of our electronic money accounts and have it the form of banknotes instead.

People in the UK accept pounds and people in the US accept dollars as money, whether it be in bank account electronic form or held as physical notes. The central money systems of the world are a series of fiat currencies issued by a national government and central bank. They have an effective monopoly on money in their country and allow private-sector banks and traders to arrange swaps and transactions that require use of more than one currency to complete.

Money has three classic uses:

  • It is a means of buying and selling. You hold banknotes or electronic pounds so you can buy things.
  • It is a unit of account. If you want to know what something will cost, its price is most likely to be expressed in local currency.
  • It is a store of value. If you have savings or a surplus it is easiest to keep it in the form of your national currency.

Inflation and bad economic management by the national government and central bank can undermine these three classic uses of money, often forcing people in such places to hold as much of their savings as possible in a more stable currency – and maybe needing to transact in dollars rather than local currency so people worldwide will deal with them.

The rise of cryptocurrencies

In recent years there has been great excitement about the creation of new digital money. The arrival of Bitcoin and other non-government offerings are said by some to have created a new money that is beyond the touch of government and less subject to inflation because the amount to be issued is controlled more tightly.

It is based on distributed-ledger technology. It is difficult to see that Bitcoin and other similar products yet have the three characteristics of money. They are not a medium of exchange for most things. You cannot buy a sandwich or some new clothes with Bitcoin. It is not a unit of account, as its value is exceptionally volatile. People do not usually quote their prices in Bitcoin. It is not a reliable store of value. It is instead highly speculative which has made many gamblers lots of money, but which can also lose you a lot in a hurry when it has one of its falls from grace.

The world's central banks are looking enviously at Bitcoin's popularity with some and asking if they can issue their own digital currency. The truth is that any central bank scheme is likely to be just another way of issuing the national currency they already create and supervise. The central banks are often hostile to independent currency products because they could threaten their monopoly and would be difficult to police. If people do find good ways to start settling major transactions in Bitcoin and refuse to share the identity of who is transacting with the authorities, there will be major concerns about regulatory and tax compliance. The authorities will need to strengthen legislation to demand the same disclosure that they can get from commercial banks with fiat money.

If the central banks come up with the idea that companies and even individuals can have a direct account with the central bank instead of needing one at a commercial bank, it will make surveillance of people for tax and regularity purposes even easier for the authorities. It will also give the authorities direct access to people's money whereas today they do need to go through an independent commercial bank and the partial protections of property law.

It is difficult to see many advantages a bank account with the central bank rather than a commercial bank would bring the customer, and difficult to believe that crooks and money launderers would volunteer to have a central Bank account to help the Bank control their criminal deeds.

There is an investment story about the growth of electronic money, but it is well advanced and has just been greatly boosted by lockdown. Many players in the credit and debit card and payments space have done well. The authoritarian countries will probably make the fastest moves towards central-bank digital money, as part of a general advance in their ability to control people and their spending patterns.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Bitcoin, Britcoin and digital money

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