Ireland central bank official warns virtual currencies ‘can challenge sovereignty of states’

For months now, several central bank officials have espoused the threats associated with digital currencies like bitcoin. Although the statements have listed the risks that are posed by bitcoins and other virtual currencies, a lot of officials mention the possibility of cryptocurrencies taking down fiat money, financial institutions and the sovereignty of states.

Case in point is Gareth Murphy, senior Central Bank of Ireland official, who delivered a speech Thursday at a digital money conference in Dublin called BitFin 2014, a conference that gathers experts in money, economics and technology and incites debate without reprisal. He touched upon matters relating to consumer protection, exchange rate policy and payment systems.

Ireland Central BankMurphy made allusions to the fact that the more consumers use digital currencies for transactions then the likelier it’ll be more governments to receive less revenue through conventional transactions. Also, he noted that the virtual currency industry could diminish a bank’s ability to influence the overall economy’s price of credit.

“At the outset, I think that it is important for me to state my belief that developments in mobile and information technology are very likely to change the landscape of financial services in the coming years.  (And indeed, there have been a number of reports written on this subject recently),” stated Murphy.

Most of the regulatory reform agenda in financial services of the last six years has been a response to the crisis of 2008.  This has taught us that we all have a stake in ensuring that severe financial crises ‒ wherever they might come from ‒ are less likely in the future.  Technology-driven innovations in payments, savings and distribution typify some of the new challenges that financial authorities are likely to face in the coming years.

The Irish central bank doesn’t recognize bitcoin as a legitimate currency, which means that consumers will not be protected in the event of a loss in digital holdings, theft or the shutdown of an exchange website. Murphy believes that once more consumers start wanting to transact different goods and services then anti-money laundering schemes will be brought to the test.

“In effect, economic activity is the aggregate of domestic transactions in the ‘euro-denominated economy’ and the ‘virtual currency economy,” added Murphy. “This is likely to have a profound operational impact on these firms and their regulatory risk profile.”

Moving forward, central banks will have a lot of variables to consider as “two worlds collide”: a euro economy and a virtual currency economy, which will have a considerable effect on exchange rates, monetary policy and the rate of credit, elements that have been controlled by central banks for decades.

“The existence of a ‘euro-denominated economy’ and a ‘virtual currency economy’ raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services).”

At the end of it all, according to Murphy, bitcoin and other virtual currencies will become a bank’s worst enemy.