Central banks hop on the virtual currencies bandwagon

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Virtual currency is once again in the spotlight; Singapore’s central bank is reportedly testing a virtual currency of its own.

Governments and companies have their own reasons to use these and we’ll explore them in this article.

Central banks jump on virtual currencies bandwagon

According to Bloomberg, the Monetary Authority of Singapore (MAS) is interested in using virtual currencies to simplify its payment process and reduce transaction cost for banks. If the initiative is pursued, people can make payments directly to each other instead of going through MAS as it is done currently.

Banks will have to pay cash as collateral to use bitcoin, and they can also convert their existing bitcoin to cash. Besides Singapore, central banks from Canada, China, and the United Kingdom are also on the bandwagon to bring virtual currencies to life in the near future.

This is actually an irony, as one of the appeals of virtual currencies lies in their decentralized nature. However, the risks of money laundering and other criminal activities would be reduced if central banks adopted it.

The current economic climate in Singapore is weak and the government is doing what it can to support SMEs; virtual currency would play a key role in reducing business costs.

Companies embrace bitcoin

While central banks prefer to create their own virtual currencies to retain control, companies are happy to use existing virtual currencies like bitcoin. Microsoft was one of the first major technology companies to embrace bitcoin two years ago. On December 11, 2014, Microsoft made a low-profile announcement on its blog, which made news quickly.

Microsoft announced that they would allow up to US$1,000 worth of bitcoin for Windows Store purchases such as Xbox games and videos. Over the next few years, the companies who accept Bitcoin payments have increased. Such companies range from sandwich chain Subway to online dating site Okcupid. Even companies like Tigerdirect and Home Depot are chiming in.

As long as there is a sizable demand for a reputable currency, companies are likely to accept such payments to stay ahead of the competition. With the growing list of companies who accept bitcoin, it may just become the main virtual currency of the future.

Scale challenge

While central banks are busy experimenting with their own virtual currencies, they might want to note bitcoin’s challenges in scaling. According to research from Cornell University, bitcoin can only handle a maximum of 27 transactions per second. Compare this to the maximum of 56,000 transactions per second that Visa can process and you’ll see the sizeable difference.

At its current nascent stage, this scaling problem is not an issue. To overtake Visa’s position, however, it would have to be re-engineered to accommodate more transactions per second. This re-engineered virtual currency would have to retain its immutability and also gain widespread acceptance from consumers and businesses.

Conclusion

While commercial virtual currencies would have to compete to gain acceptance, national ones would have the monopoly in their own market. The early success of commercial virtual currencies indicates that banks are likely to embrace the national counterpart once they are in circulation.

Given their local monopoly, central banks are the best candidates to roll out a strong virtual currency that can take on Visa. Then, it is up to companies to adapt to the new currencies, accepting payments from their consumers.