Innovations in the financial sector

26 February 2015

On 19 February, Jens Weidmann, President of the Deutsche Bundesbank, gave a speech at the Center for Financial Studies (CFS) following an invitation from CFS President Otmar Issing. Weidmann talked about innovations in the financial sector, especially cyber money, and their consequences for monetary policy.

There have been several innovations in payment systems and currencies in the financial sector in recent years, for example PayPal and Apply Pay or the new regional currency “Chiemgauer”, Weidmann said. Cyber money, such as Bitcoins, includes both aspects: it is a new currency as well as a new payment system. Digital currencies are decentralized systems which do not need a central currency issuer that guarantees the authenticity of the currency, Weidmann explained. Electronic encryption systems that are managed by decentralized databases are used in order to ensure that a person wanting to pay with the digital currency actually owns it. Cyber money thus constitutes an alternative to state-managed currencies and aims at replacing the financial intermediation function of banks by a decentralized system.

According to Weidmann, Bitcoins have no intrinsic value, but money supply is limited to a maximum amount and thereby the currency becomes valuable. Moreover, new Bitcoins can only be produced by solving mathematical equations that become more and more complex. The increasing computing effort, for which more and more powerful computers are needed, ensures that the growth rate of the currency is decreasing. In general, Bitcoins are mostly used as an object of speculation or as a store of value but are not suitable for everyday shopping. The currency is very volatile which constitutes a risk for investors, Weidmann warned. In case of a loss, there is no deposit insurance for Bitcoins; no competent central bank that could counteract currency fluctuations, and no regulatory authority that could intervene if necessary.

In Weidmann’s view, digital currencies are currently not posing a risk for financial stability because they are not widespread enough. Further, he does not assume that in the future cyber money will prevail over currencies issued by an independent, stability-oriented central bank.