Virtual currency: the Central Bank's Perspective

Cryptocurrencies are financial and social phenomenon. The Bitcoin, for example, has several characteristics, which make it alternative money. The number of Bitcoins is limited (by design) to 21 million. In this respect Bitcoin is similar to gold. In addition, it is extremely easy to transfer Bitcoins between any locations in the world, at high speed and at very low cost. This paper looks at Bitcoin from the central bank's perspective. Taking into consideration central bank's goals and functions, possible consequences of Bitcoin usage are discussed. It is shown, that any purchase of Bitcoins in no way could increase inflation. To the contrary, it may tend to support deflation. What concerns financial stability: Bitcoin does not yet have the scale to act as a systemic contagion of instability or lapse in network integrity. But the real problem could be substantial involvement of financial institutions in cryptocurrencies. From a central bank's perspective this might be quite dangerous and should be limited by law. If Bitcoin begins to undermine the financial and tax systems they will be shut down and all contracts between traders would be unenforceable.