Could Bitcoin cripple the world's economy?

If you are plugged into the world of cryptocurrency you’ll be aware that the Bank of England appears to be worried that the trading of Bitcoin could lead to a crash in the financial market similar to that seen in 2008. That came out in an interview earlier this week where Sir Jon Cunliffe, deputy governor of financial stability, called for the regulation of crypto declaring it a growing threat to the global economy. Gareth, you might have to take me right back to basics. What is Bitcoin and why is it causing such a stir?

Gareth - Yeah, sure. Bitcoin is a digital asset basically. So it's a digital asset that we can buy and sell through exchanges. But there's a key difference because you might say that an MP3 file or a JPEG, they're both digital assets. Like this radio show, if it's available as a podcast, it is a digital asset. But the thing is of course, with an MP3 file, you can make as many copies as you want. So that would be a pretty lousy currency. It would be like photocopying bank notes, it would just be ridiculous. It wouldn't work. So the thing that makes the digital asset that is Bitcoin a currency is the way that, for instance, if I'm exchanging something to you and we're exchanging Bitcoin, the proof that I've handed that asset to you and the proof that you can trust is that that transaction is logged on this thing called the blockchain. I'm sure lots of people have heard about blockchains. There are lots of really complicated explanations for them, but you can think of the blockchain as almost like a massive, great big shared spreadsheet, and everyone has a copy of this spreadsheet. And so that transaction between, for instance, you and I of that Bitcoin is logged on this spreadsheet and Chris, or anybody else, could come along and then delete that entry from the spreadsheet. But every entry is what we call cryptographically sealed. So once it's there, it can't be removed. And so that makes it an asset that can be bought and sold. And without a trusted third party, that's why people are saying it will do away with banks because traditionally for us to exchange assets, we would have to go through some kind of trusted third party, which might be a bank or a traditional currency.

Harry - And it's been around for quite a while, Gareth. So why is it now all of a sudden starting to scare the financial market?

Gareth - I think because it's just grown so much. Blockchain has become such a thing. Say five years ago, a Bitcoin was worth just 500 pounds. And as we record this, the value when I looked it up just now is 46,000 pounds for a Bitcoin. So it has grown to the level that people like us are talking about it and the big central banks are talking about it. And so it's obviously capturing a lot of attention. And I suppose the question is, does that attention warrant Bitcoin some sort of special status. People are saying it's going to disrupt, and probably is already disrupting, the banking system. But will it do away with central banks and traditional currencies altogether? And I think that's the big discussion at the moment.

Harry - It takes me back to the thought of when it was first around and you could spend a Bitcoin or something, buying a cup of coffee.

Gareth - And that is actually one of the worst things about it, absolutely. Imagine if you hold some Bitcoin, are you going to say, a bit like your cup of coffee example, well, because I'm sitting on this asset that's going to appreciate in value - I'm banking effectively on it, doubling or quadrupling or more in value over a certain period of time. You're going to say, well, I'm not going to buy that cup of coffee, or I'm not going to buy that house or that yacht, or what have you, because this asset that I have sitting in my crypto wallet is going to be worth a lot more in a while. And that to me is one of the big problems of it being a currency, because you tend not to look at the pounds in your bank account and think, well, I better hadn't spent these pounds because you know, by next month they could be worth twice as much so I'll just hold onto them until then. So actually that cup of coffee example completely, embolises why for many people, Bitcoin is problematic.