6 September 2016

Virtual currencies unlikely to crowd out fiat currencies, according to new research

New research from the SWIFT Institute assesses whether the global financial community is accepting Bitcoin as a valid currency.

Brussels, 6 September 2016 – The SWIFT Institute has published a new research paper analysing whether Bitcoin will crowd out fiat currencies in the global community.

The paper, entitled “Virtual currencies: Media of exchange or speculative assets?”, looks at the dynamic relationship between virtual currencies, such as Bitcoin, and fiat currencies, and evaluates any immediate risks that virtual currencies pose to monetary, financial or economic stability. The research was conducted by Dirk G. Baur, UWA Business School, KiHoon Hong, Hongik University College of Business in South Korea and Adrian D. Lee, University of Technology Sydney (Australia). 

Key Findings from the research include:

  • Virtual currencies are unlikely to crowd out fiat currencies – The price impact of speculators in virtual currencies adversely affects their property as a medium of exchange and renders a crowding out of existing fiat currencies, such as the US dollar, unlikely.
  • Bitcoin is mainly used as a speculative investment – An empirical analysis of Bitcoin prices and user accounts (wallets) supports the theoretical result and finds that Bitcoin is mainly used as a speculative investment rather than a medium of exchange.
  • No correlation exists between Bitcoin and traditional asset classes – Bitcoin returns are uncorrelated with traditional asset classes such as stocks, bonds and commodities, both in normal times and during periods of financial turmoil.
  • Virtual currencies pose no immediate macro risk – The design and the size of markets for virtual currencies such as Bitcoin do not pose an immediate risk for monetary, financial or economic stability.

“Contrary to conventional wisdom, our research shows that fiat currencies crowd out Bitcoin, not the reverse, and that the design and size of the Bitcoin market deprives the currency of its intended use as a medium of exchange,” says KiHoon Hong, Hongik University College of Business. “What is also evident is that Bitcoin poses minimal risk to financial or monetary stability. Despite this, if the acceptance of Bitcoin or other virtual currencies increases significantly on a global scale, it could have significant consequences on the relevance of monetary policy, as its decentralised and independent nature makes regulatory oversight difficult.”

Please click here to view a copy of the full report.

 

 

 

 

 

Disclaimer:
The views and opinions expressed in this paper are those of the authors. SWIFT and the SWIFT Institute have not made any editorial review of this paper, therefore the views and opinions do not necessarily reflect those of either SWIFT or the SWIFT Institute.


About SWIFT Institute
Launched in April 2012, the SWIFT Institute fosters independent research to extend the understanding of current practices and future needs across the financial industry.  Managed by SWIFT, and working in close collaboration with academics from top international universities, the SWIFT Institute brings the financial industry and academia together to explore ideas and share knowledge on topics of global importance.

The research covers various aspects of transaction banking, including the following areas: Payments, Clearing / Settlement, Cash Management, Trade Finance, Trust and Securities. 

For more information, please follow us on LinkedIn: SWIFT Institute or Twitter:@SWIFTInstitute or visit http://www.swiftinstitute.org/


About SWIFT
SWIFT is a global member-owned cooperative and the world’s leading provider of secure financial messaging services.

We provide our community with a platform for messaging and standards for communicating, and we offer products and services to facilitate access and integration, identification, analysis and financial crime compliance.

Our messaging platform, products and services connect more than 11,000 banking and securities organisations, market infrastructures and corporate customers in more than 200 countries and territories, enabling them to communicate securely and exchange standardised financial messages in a reliable way.

As their trusted provider, we facilitate global and local financial flows, support trade and commerce all around the world; we relentlessly pursue operational excellence and continually seek ways to lower costs, reduce risks and eliminate operational inefficiencies.

Headquartered in Belgium, SWIFT’s international governance and oversight reinforces the neutral, global character of its cooperative structure. SWIFT’s global office network ensures an active presence in all the major financial centres.

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