In response to recent claims that Bitcoin might pose a threat to the pre-eminent US dollar, Dr Timothy King, Senior Lecturer in Finance Banking and Innovation and Director of the Centre for Quantitative Finance at the University of Kent’s Business School, gave his insights, saying:
‘Paypal co-founder Peter Thiel recently asserted that Bitcoin should be viewed as a “Chinese financial weapon” and a real threat to US global power. Some have otherwise predicted that Bitcoin will cause a revolution of the finance world.
‘Given the decentralised nature of cryptocurrencies, it is difficult to argue credibly that Bitcoin is a tool created to deliberately destabilise the U.S dollar. Yet, the suggestion that Bitcoin could displace the US dollar as the world’s reserve currency, a position held since World War 2, is one that is interesting.
‘It’s worth remembering that the US dollar was made the world’s reserve currency in the Bretton Woods Agreement of 1944, at a time when the world looked for central authority. Now the world is in a state of comparative security further inspired by the rise of the internet and technology. Bitcoin differs fundamentally from currencies issued by centralised authorities (namely central banks) since it is decentralised.
‘Bitcoin will be increasingly relevant as means of payment and an alternative asset, but it is unlikely to displace the US dollar. For Bitcoin to be considered fiat, a legal tender, it should at a minimum, be useful as a medium of exchange (i.e. a means of payment), store of value (i.e. the value of Bitcoin should hold its value over time and not perish or depreciate as rapidly as it does) and unit of account.
‘Although Bitcoin is increasingly used as medium of exchange, it is highly debateable whether it will ever function strongly enough as a store of value and unit of account given its highly volatile nature. Bitcoin also faces stiff competition from central banks and countries that would be highly reluctant to forgo their dominant positions as issuers of fiat money. Many are already experimenting with digital currencies that utilise blockchain technologies that may undo the enthused support Bitcoin currently enjoys.
‘Understanding how things will progress with cryptocurrencies will require further discussion amongst regulators, to appreciate that there is a growing push for change, but that there is a greater need for stability. Research being conducted by members of the Centre for Quantitative Finance at Kent Business School is aiming to inform such debate and stimulate dialogue.’
Dr Tim King, Senior Lecturer in Finance Banking and Innovation, University of Kent
Dr King’s research focuses on the theme of corporate governance in banks (and non-banks) and on the response of the banking community to technological and regulatory disruption including the emergence of cryptocurrencies and blockchain technology.
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