$10,000 in sight for bitcoin as it rockets to new record high

$10,000 in sight for bitcoin as it rockets to new record high Banks mull own digital currencies

FRANKFURT: 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.

Meanwhile, Bitcoin’s vertiginous ascent showed no signs of stopping yesterday, with the cryptocurrency soaring to another record high just a few percent away from $10,000 after gaining more than a fifth in value over the past three days alone. The digital currency has seen an eye-watering tenfold increase in its value since the start of the year, and has more than doubled in value since the beginning of October. It surged 4.5 percent on the day yesterday to trade at $9,687 on the Luxembourg-based Bitstamp exchange. Bitcoin’s price has been helped in recent months by the announcement that the world’s biggest derivatives exchange operator CME Group would start offering bitcoin futures. The company said last week the futures would launch by the end of the year though no precise date had been set.

“$10k is on the cards and bitcoin seems to be straining at the leash to reach it,” said Charles Hayter, founder of cryptocurrency data analysis website Cryptocompare. “Promises of bitcoin futures opening the door to institutional money are supercharging the price.” 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 problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything,” European Central Bank policymaker Ewald Nowotny told Reuters.

“So we’re trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated.” 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 US Federal Reserve or the ECB.

These institutions issue yen, US dollars and euros, both by creating physical cash or by crediting banks’ accounts, as is the case with their bond-buying programs. 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. “Bitcoin is a sort of tulip,” ECB Vice President Vitor Constancio said in September, comparing it to the Dutch 17th century trading bubble. “It’s an instrument of speculation.”

Legal tender

China and South Korea, where cryptocurrency speculation is popular, banned fundraising through token launches, whereby a newly cryptocurrency is sold to finance a product development. Russia’s central bank said it would block websites selling bitcoin and its rivals while the ECB told European Union lawmakers last year “they should not seek... to promote the use of virtual currencies” because these could “in principle affect the central banks’ control over the supply of money” and inflation. Yet Japan in April recognized bitcoin as legal tender and approved several companies as operators of cryptocurrency exchanges but required them register with the government.

The ECB, the Bank of Japan and Germany’s Bundesbank are already testing blockchain, admitting it may have a future use for the settling of payments.

The BOJ last year set up a section in charge of Fintech to offer guidance to banks seeking new business opportunities, and joined up with the ECB to study distributed ledger technology(DLT) like blockchain. They concluded that blockchain was not mature enough to power the world’s biggest payment systems.

Lukewarm

Commercial banks have so far been lukewarm to existing digital currencies. But with electronic payments already supplanting cash, they’re alert to the danger that they would lose business if their clients decided to switch to them. For this reason, Swiss banking giant UBS is leading a consortium of six banks trying to create its own digital cash equivalent of each of the major currencies backed by central banks. This would allow financial markets to make payments and settle transactions more quickly. —Reuters