The latest hue and cry against Bitcoin stems from lack of a central bank to make loans in a hypothetical liquidity crunch.
Bitcoin has been attacked for various reasons in the past – usage in crime, speculative bubble, etc. BNP Paribas has joined the chorus, saying that Bitcoin’s future is limited because there is no ‘lender of last resort.’
Deflationary with no central bank
According to a report published in the Telegraph, BNP Paribas has stated that the future of Bitcoin is limited, primarily because of the lack of a lender of last resort. According to BNP Paribas, this would result in significant risks and undermine monetary policy. The bank also attacks Bitcoin over its deflationary nature (limited issuance), high volatility and lack of regulation. While it has accepted that Japan has recognized Bitcoin as legal tender and positioned itself as technology-friendly, other governments could act against Bitcoin.
The potential threat to central bank seigniorage, worries about money laundering, financial stability, tax avoidance and crime, all make regulatory moves elsewhere possible.
BNP Paribas’ primary concern is that in case of a financial crisis (like 2008-09), there is no central authority to regulate the products based on Bitcoin.
Central bank for a decentralized currency?
Lenders of last resort usually play an important role when liquidity dries up in a market. When banks face a sudden increase in demand for return of deposits, they usually turn to a central bank, which acts as the lender of last resort, to provide liquidity. However, in a decentralized currency, there is no need for any financial intermediaries (banks) to hold your money. Hence the concept of a bank run would appear strange in the Bitcoin world. While the banks’ ability to expand money supply through fractional reserve lending is restricted, the risks associated with liquidity drying up are also reduced.
Same bank, different researchers, different views
Bitcoin can be a divisive topic, as views on Wall Street range from calling Bitcoin an outright fraud (Jamie Dimon, JP Morgan) to saying that it is more than a fad (James Gorman, Morgan Stanley). Views can be different even within a bank. Just a couple of years ago, BNP Paribas had published a report calling Bitcoin a disruptive invention like the combustion engine. BNP Paribas is also active in adopting Blockchain technology, having experimented with real-time transfer from bank accounts in Germany, the United Kingdom and the Netherlands. The future of Bitcoin is definitely not limited in the views of these researchers.
