Research by the SWIFT Institute has found that virtual currencies such as Bitcoin are unlikely to 'crowd out' fiat currencies.
The report – Virtual currencies: Media of exchange or speculative assets? – uses a theoretical model to analyse the dynamic relationship between virtual currency and fiat currency, looking at the risks that virtual currencies pose to financial and economic stability.
The research hypothesises that if Bitcoin were mainly used as a currency to pay for goods and services, it would compete with fiat currency such as the US dollar, thus influencing the value of the fiat currency and ultimately influencing monetary policies implemented by a central bank. Likewise, if Bitcoin were mainly used as an investment, it would compete with a large number of other assets such as government bonds, stocks and commodities. However, the study showed that neither of these scenarios is currently true. It found that:
- Bitcoin is mainly used as a speculative investment, rather than for commerce purposes;
- there is no correlation between Bitcoin and traditional asset classes, such as stocks, bonds and commodities; and
- virtual currencies pose no immediate macro risk.
Bitcoin could pose difficulty for regulation
However, one of the study's authors, KiHoon Hong, of the Hongik University College of Business, warned that virtual currencies could in future have an impact on monetary policies and regulatory oversight if currencies such as Bitcoin become more accepted globally.
He said: “Contrary to conventional wisdom, our research shows that fiat currencies crowd out Bitcoin, not the reverse, and that the design and size of the Bitcoin market deprives the currency of its intended use as a medium of exchange. What is also evident is that Bitcoin poses minimal risk to financial or monetary stability. Despite this, if the acceptance of Bitcoin or other virtual currencies increases significantly on a global scale, it could have significant consequences on the relevance of monetary policy, as its decentralised and independent nature makes regulatory oversight difficult.”
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