"Virtual and digital currencies can challenge the sovereignty of states,” says Gareth Murphy, senior Central Bank of Ireland official. At a recent digital money conference in Dublin, he mentioned that rivals are interfering with a bank's ability to sway the price of credit for the entire economy. Murphy warned that there might be considerable threat to the finances of a country if increasingly more transactions for services and goods fade away from the tax system due to the use of crypto currencies such as Bitcoin. He added:
“Central banks, [out] of necessity, have monopolized the exercise of these functions. Virtual currencies pose new challenges to central banks’ control over these important functions.”
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Gaining ground in Ireland
Losing confidence in currencies may lead to uncertainty, which can trigger significant drops in economic activity. The Central Bank has constantly emphasized that it doesn't recognize digital currencies such as Bitcoin in Ireland. Nonetheless, those who choose to use Bitcoin anyway won't have consumer protection.
As the Director of Markets Supervision at the Central Bank, Mr. Murphy is well aware that virtual currencies could offer a great option for people looking to buy and sell different services and goods. He added that in these circumstances, the anti-money laundering rules will be thoroughly tested. Failure of settlement infrastructure and payments, or any sort of "financial plumbing,” could have a great impact on the country's economic activity and consumer confidence. Murphy said:
“In effect, economic activity is the aggregate of domestic transactions in the ‘euro-denominated economy’ and the ‘virtual currency economy.’”
Because digital currencies pervade economic activity, major financial institutions and banks will most likely feel the effects. Other major financial institutions don't see Bitcoin as a threat to their operations. However, in Murphy's view, these institutions would be foolish to have this kind of attitude towards the technology, mentioning:
“This is likely to have a profound operational impact on these firms and their regulatory risk profile.”
Monetary and economic changes
In today's hybrid economy, central banks will have to face a lot of economic challenges. Digital currencies defy the way these institutions calibrate exchange rates, monetary policy and set price of credit. Supporting Bitcoin and encouraging its growth would have to be attentively monitored. Gareth Murphy added:
“The existence of a ‘euro-denominated economy’ and a ‘virtual currency economy’ raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services).”
Virtual currencies - a bank's worst enemy
Most economies function with many different currencies and the USD is the most frequently used on a global scale. Bitcoin undermines a central bank's ability on matters such as economic analysis, data collection, supervision, policy formation, enforcement and resolution, so these sort of implications can't be overlooked.
As far as regulation is concerned, Murphy suggests that Bitcoin shouldn't take things for granted and assume its actions will keep falling under US and Switzerland regulations. He did mention that Bitcoin should be used to support indefinite innovations that may come from a wiser use of the technology:
“We should not presume that current regulations are future-proof. It is possible that further innovations will mean that these regulations may no longer apply. This suggests that new regulations may ultimately be needed which are based on new legal concepts with a clear scope which must stand the test of time.”
Virtual currencies will soon become a bank's worst enemy, and that's because they're offering lower fees, commissions, greater convenience etc. Bitcoin might gain control over the most important functions of exchange rate and monetary policy. In spite of the currency's relative instability, more people are turning their attention to Bitcoin, and the more publicity it receives the higher chances it has to become ubiquitous in our everyday lives.