Digital Currency to Replace Banks?

Conventional banking has been in the media in a whole new way since the invention of Bitcoin technology. The banking system has been bailed out by the government and now many wonder just how long that bail out will last as Bitcoin and other digital currencies could be replacing regular currency for good. 

Digital currencies could disrupt the ability of central banks to exercise control over the economy or issue money should the technology scale, the Bank for International Settlements (BIS) said in a new report released today.

The BIS, a financial entity cooperatively owned by the world’s central banks, said that it has been looking at the technology as early as November 2013, and in February of this year the Committee on Payments and Market Infrastructures (CPMI) asked a working group to draft the report it published today.

The report outlines how digital currencies like bitcoin as well as its underlying decentralized ledger, the blockchain, could impact central banks and the broader global financial system.

While stressing that such outcomes are incumbent on “widespread adoption”, the BIS paints a possible future in which its ability to conduct monetary policy, assess the flow of money or even generate revenue on the currency it issues becomes limited.

As the report notes:

“A widespread substitution of banknotes with digital currencies could lead to a decline in central bank non-interest paying liabilities. This, in turn, could lead central banks to substitute interest paying liabilities, reduce their balance sheets, or both. The result could be a reduction in central bank earnings that constitute central bank seigniorage revenue.”

The ability of central banks to gather data on money aggregates, or measurements of the money supply, could also be hampered should digital currency use become widespread.

“Significant expansion of digital currencies could also raise a number of technical issues regarding the appropriate definition of monetary aggregates, especially if the digital currencies were not denominated in the sovereign currency,” the report notes. “In a monetary policy regime heavily focused on the growth of monetary aggregates, such measurement difficulties could create some complications for monetary policy implementation.”

Read more at: http://bit.ly/1XmK1a2

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