Sweden: Bitcoin is wild west, but it could be a central bank's backup plan
According to an economist at the 'stability department' of Sweden's central bank, the Riksbank, Bitcoin could be used to strengthen financial systems in the face of disruption to a main payment processing network.
The fact that Bitcoin was designed to function beyond the reach of central banks and regulators has often seen it cast as a risk to consumers and those dealing in virtual currencies. As the European Banking Authority (EBA) has previously warned, Bitcoin exchange rates are volatile, exchange platforms and wallets can be hacked, and holders may face tax liabilities.
Hoping to prevent Bitcoin volatility infecting traditional financial systems, in July the EBA then told European national regulators to "discourage credit institutions, payment institutions and e-money institutions from buying, holding, or selling virtual currencies".
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But what about the risks that regulated financial services themselves introduce — for example, a multi-day outage at a major bank due to underinvestment in IT systems? Consumers in the UK will recall the Royal Bank of Scotland's glitches of 2012 that held up payments for several days. And when wages are delayed, payments are too, making rent to landlords difficult to pay and bills hard to meet.
Further up the financial services chain, what about an outage at a central bank that acts as a country's payment hub — could Bitcoin be used to prevent a similar, but more devastating, situation there?
The Riksbank's funds transfer system RIX touches all payments between banks, clearing organisations and other agents operating in Sweden. It is, as Riksbank says, "the banks' bank in the settlement of payments in Swedish kronor", with a daily turnover equivalent to 16 percent of the country's gross national product.
For over a decade, Riksbank has had physically isolated backup facilities that duplicate RIX production data in real time, which, according to the Bank for International Settlements, in 2003 allowed Sweden's central bank to switch to backup systems within two hours of a disruption. During a RIX outage, banks would need to revert to manual procedures.
Since 2003 RIX has suffered at least two disruptions that forced it to revert to contingency plans — one in 2008 and another 2013, both which took a full day to resolve during which time other banks reverted to manual processes to clear payments.
Diaster recovery?
It's against that background Riksbank 'stability department' economist, Björn Segendorf, believes that Bitcoin could actually strengthen traditional payment systems and counts as a potential benefit of Bitcoin to society.
"[A] virtual currency like Bitcoin can contribute over time to a more robust payment system by not all payments passing through the traditional financial infrastructure that constitutes hubs around which the payment flow is concentrated. If the functioning of such a hub were disrupted for some reason, the related payment traffic also comes to a halt. The mere fact of there being alternative routes for certain types of payment is positive from a contingency point of view," he said in a recent report into the currency.
The other potential benefit Segendorf sees is that Bitcoin spawns innovation in new payment services and financial services that can be built around it, he added.
Despite the positive role Bitcoin could play in the stability of payments and financial system, Segendorf's survey found Bitcoin use in trading and as a means of exchange was insignificant in Sweden.
In August, only 30 businesses in Sweden accepted payments in Bitcoin while SEK/Bitcoin exchanges appear to take up a small share of global transactions. If it was to be a viable contingency plan, Bitcoin would need to be widely adopted.
And it would appear that Segendorf agrees with the EBA's view to keep Bitcoin outside of the financial services sector, with the economist noting that if key players in retail payments had major Bitcoin holdings they could be exposed to "substantial financial risks".
So what are the chances Bitcoin will take hold as a currency?
Similar to a recent analysis of Bitcoin from François R Velde, a senior economist at the Federal Reserve of Chicago, two obstacles that Segendorf sees are the loss of anonymity compared with cash and the lack of real-time payments.
"It can take up to an hour for a user to be sure that the payment really has gone through. This makes Bitcoin unsuitable for many types of common payments, such as at the checkout of a convenience store," Segendorf notes.
By contrast, the issue of real-time payments using card "is resolved by reserving funds in the account of the payer and guaranteeing the payment to the payee".
"Bitcoin, which does not have a central issuer or verification process, cannot do this. However, individual payment service providers can guarantee Bitcoin payments to their customers. But, finding a guarantee that supports the decentralised usage of Bitcoin, without central participants, is difficult."