It would become more a matter of prudential policy, not to say the fundamental structure of the financial system. Conclusion The word “digital” has become so ubiquitous that its meaning isn’t always clear. The word seems to get tacked on to just about anything, no matter how tenuous its connection with computers, simply in order to convey an appealing sense of the modern. A brief search – on the internet, appropriately enough – reveals advertisements for a course in “digital humanities”, opportunities in “digital agriculture” and even something called “digital parenting”, whatever that is. (If it means having to ask your 11-year-old son what’s gone wrong with the computer then I would certainly qualify as a “digital parent”). Whether or not “digital currency” is the right way to describe something like bitcoin, or its central bank counterpart, is also unclear. A better term for the underlying technology, the distributed ledger, might be “decentralised virtual clearinghouse and asset register”. But there’s no denying the technology is novel. Prospectively, it offers an entirely new way of exchanging and holding assets, including money. It’s an irony, therefore, that some of the economic questions it raises have actually been around for a long time, for as long as economics itself. Some admirers of bitcoin see it as a means of bypassing central banks altogether. They are in some ways the descendants of the supporters of “free banking” in the 19th century.
But that’s generally the sort of thing that has to happen: almost always, these currency substitutions occur only once the existing currency has become deeply compromised3. Even then, the thing people naturally reach for is an existing, trusted currency – often the US dollar – rather than some entirely new unit of account. So if it’s neither the “digital” nor the “currency” aspect of bitcoin that matters, what is it that has sparked so much interest? Well perhaps a better name for what we’re talking about, albeit more of a mouthful, is a “decentralised virtual clearinghouse and asset register”. As the Quarterly Bulletin articles explain, the key innovation in bitcoin is its settlement mechanism. Instead of relying on an independent third party to process and record transactions, holders of bitcoin use a decentralised computer system called the “distributed ledger”. The distributed ledger works by encouraging users to verify for themselves, and others, blocks of transactions made over time. As everyone in the system has the right to do this, and everyone can see the results, there is no need for a trusted, centralised clearer. In principle, this technology could be applied to many things, not just the exchange and registering of financial assets. A recent official report in the UK suggested that distributed ledgers might eventually be used for a wide variety of government services, including the collection of taxes, the delivery of benefits – potentially including new “smart” transfers that could target particular groups – the keeping of business registers and other things besides4.