Will virtual currencies destroy national currencies?

Cryptocurrencies are digital currencies whose creation and transfer are based on encryption technologies, the best known of which is blockchain technology. There are over 1,000 virtual currencies in the world. The most used are Bitcoin and Ether (also called Ethereum). The capitalization of this market is estimated by observers between 1 and 10 billion dollars.

However, virtual currencies and digital currencies should not be confused. We already pay for our purchases with credit cards or smart phones but payments are made in regulated currencies and entered in our bank accounts. The money is stored digitally on our accounts and can be used to make or receive payments.

A way topay ?

Virtual currencies are not legally priced, they can not be considered as currencies. "To be considered as currency, a form of currency must be used as a unit of account, a store of value and a means of exchange," explains Martin Arnold, Strategist at ETF Securities. Virtual currencies are mainly used as a store of value and very occasionally for purchases or sales of goods and services, but ultimately amounts are generally transferred to accounts denominated in sovereign currencies.

The virtual currencies, essentially the Bitcoin, are extremely volatile. It is therefore difficult to make it a stable monetary exchange instrument. "Price stability is essential for currencies to be a reliable means of exchange: if a given basket of goods costs 100 pounds today and 50 pounds in a week, this discourages the adoption of large-scale virtual currency scale, "says Martin Arnold. However, some payment companies have already taken the plunge. American Express has partnered with Abra, enabling cardholders to make Bitcoin transactions for the first time on this peer-to-peer payment application.

An investment instrument?

Some retail investors buy Bitcoin as an investment instrument or, rather, speculation. Given the high volatility of these virtual currencies, this type of investment can only be conceived for sophisticated investors who are prepared to take a significant risk. Some major fund managers, such as Fideltiy Investments, have incorporated virtual currencies into portfolio positions. This firm has now set up on its website the possibility of posting positions in Bitcoin, Litecoin and Ethereum, which makes it possible to integrate these positions in a global view of the portfolio of assets. However, the management company does not allow transactions to be executed in these currencies but only to consult its holdings in virtual currencies thanks to an agreement with Coinbase, a platform that allows exchanges in crypto-currencies.

In addition, we see the proliferation of ICO (Initial Coin Offerings) which are the equivalent of IPOs (IPOs) but in virtual currency on platforms dedicated to crypto-currencies. These transactions present significant risks in terms of transparency but also linked to highly volatile virtual currency.

A monetary policy tool?

The expansion of the use of these currencies could give ideas to the monetary authorities. But in reality, because of their decentralized nature and because there is no counterpart of trust which in essence guarantees money, crypto-currencies bypass the normal monetary channels. Traditional monetary policies could be undermined if the use of virtual currencies became widespread. But to be generalized, these means of payment should acquire the confidence of the public. They should also be less volatile. Moreover, the supply of these currencies is in essence limited. The mass of money can not be used as an instrument of monetary policy. They are therefore not adapted as a monetary policy tool.

Would a virtual currency issued by a central authority, however, be conceivable?

"A digital currency issued by a central authority but using a decentralized legitimation framework could reduce the number of intermediaries and increase the effectiveness and efficiency of monetary policy in several ways. First, the transactions would be verifiable independently, and this would likely increase transparency. Second, the regulation of money outside a single entity could save time and be less costly. It is important to note that by distributing funds directly to consumers and businesses, the transmission of the policy will be more direct, essentially bypassing the banking system, "warns Martin Arnold.

Some central banks around the world have considered the possibility of launching a crypto-currency, but for the time being, high volatility, widespread lack of use, price fixing and distribution this type of emission unrealistic.