Bank of England Governor: ‘Cryptoassets Such As Bitcoin’ Are ‘Not Money’

Bank of England Governor: ‘Cryptoassets Such As Bitcoin’ Are ‘Not Money’

On Tuesday (June 15), Andrew Bailey, the governor of Bank of England (which is the central bank for the United Kingdom), talked about cryptoassets.

His comments about crypto were made as a part of a speech (titled “Innovation to serve the public interest”) he gave yesterday at TheCityUK Annual Conference 2021.

Bailey started by explaining the difference between “central bank money” and “commercial bank money”:

There are two forms of money in use in the UK – and there is nothing unusual about the UK in this respect. Central bank money is a liability of the Bank of England. It is available to the public in the form of cash, and to commercial banks in the form of reserve accounts held at the Bank. Private money takes the form of deposits in commercial banks, held by the public – our bank accounts.

Central bank money anchors the system – it establishes and maintains sterling as the monetary unit of account in this country. It does that by having the full force backing of the state. But it is a small part of the overall monetary system, and increasingly so when viewed through the lens of payments. The use of cash in payments has been declining for some time, and the pace of decline has picked up during the period of Covid. Somewhat paradoxically, the amount of cash in issue has not declined, and there are sections of the population who continue to rely on cash. To be clear, we have no plans to end banknotes. 

Commercial bank money is widely used as a means of payment, a store of value, and for making loans in the real economy. But use of commercial bank money has come to rely on its relative efficiency, the regulation of the banking system to ensure its safety and soundness, depositor protection, and public confidence that commercial bank money can be exchanged for central bank money in the form of cash at all times.

He then pointed out the difference between fiat-backed privately-issued stablecoins and other forms of crypto assets (such as Bitcoin):

A key point here is that rather than use commercial bank money as the basis for transactions, providers of digital money would create and use their own money or ‘coin’. And, they could be issued by companies, including large technology platforms, with the capacity to scale up and grow rapidly. These are often known as stablecoins. 

They are distinct from cryptoassets such as Bitcoin, which have no backing and thus no anchor to provide stability of value. A cryptoasset is not money (hence the term cryptocurrency is misleading) and has no intrinsic value because it has no backing. It can have extrinsic value, in the sense that people like to collect and own them, just as they like to collect and own all sorts of things, but that extrinsic value is highly unstable and could be nothing. I have met crypto enthusiasts who take the libertarian view that something backed by nothing has more confidence in value than something backed by the state. Suffice to say, that is not a view I agree with.

The Bank of England (BoE) governor believes that “stablecoins have the potential to be systemic in terms of their importance for the financial system and its stability” and that “any new form of digital money in order to succeed will need to be trusted as a store of value and as an accepted means of payment.” That’s the reason “the Bank of England’s Financial Policy Committee has set out its expectations to inform the design and regulation of stablecoins, and thus lay a clear foundation for sustainable innovation by setting out the public interest.”

Regarding the regulatory model for stablecoins, Bailey said that “a key requirement will be to ensure that, unless the stablecoin is operating as a bank, the backing assets for stablecoins cover the outstanding coin issuance at all times.”

According to a report by Reuters, on 12 October 2020, the BoE governor commented on Bitcoin’s “intrinsic value” (or lack thereof). Here is how Stanford University’s Encyclopedia of Philosophy explains the difference between intrinsic and extrinsic value:

“Intrinsic value has traditionally been thought to lie at the heart of ethics. Philosophers use a number of terms to refer to such value. The intrinsic value of something is said to be the value that that thing has ‘in itself,’ or ‘for its own sake,’ or ‘as such,’ or ‘in its own right.’ Extrinsic value is value that is not intrinsic.”

Per the Reuters report, Bailey said during a BoE Q&A session with members of the public:

I have to be honest, it is hard to see that Bitcoin has what we tend to call intrinsic value… It may have extrinsic value in the sense that people want it.

Apparently, he added that this uncertainty about Bitcoin’s intrinsic value made him “very nervous” about people using Bitcoin as a means of payment. 

On 4 March 2020, Bailey had this to say about Bitcoin during a meeting of the Treasury Committee of the UK Parliament: 

There’s no guarantee of the value of Bitcoin. I’ve said publicly, because we were concerned about it… if you want to buy Bitcoin, be prepared to lose all your money.

If you want to buy it, fine, but understand that what you’ve got has no intrinsic value. It might have extrinsic value, but it has no intrinsic value… it hasn’t caught on much…

According to a report by the BBC, on 14 December 2017, when the Bitcoin price was around its all-time high, Bailey, who was the head of the Financial Conduct Authority (FCA) back then, essentially told the BBC in an interview on news and current affairs program Newsnight that investing in Bitcoin was a form of gambling.

These are some of his comments from that interview:

  • It’s not a currency, it’s actually not regulated in its Bitcoin form.”
  • It’s a very volatile commodity in terms of its pricing… We know relatively little about what informs the price of Bitcoin… It’s an odd commodity as well, as the supply is fixed.
  • If you want to invest in Bitcoin be prepared to lose your money – that would be my serious warning.

He also pointed out that it was not up to the FCA, but the UK Parliament whether a commodity like Bitcoin should be regulated:

It would be for Parliament ultimately to make that choice if it wished to do so… I don’t press for that providing people understand very clearly this is a very volatile commodity… [But] if parliament wants to go further we will happily provide the evidence we have and will support the decision they want to take.

Bailey also was asked in that interview whether it was appropriate to think of Bitcoin as a currency.

He said:

By adopting the name of cryptocurrency there is a risk that some people regard it as the same as what an economist would call a fiat currency… A fiat currency is backed by the state and that’s what preserves the value of the currency through the actions that central banks take… Bitcoin is not that – it’s not a currency.

DISCLAIMER

The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.

IMAGE CREDIT

Photo by “KaiPilger” via Pixabay

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