A central question in the Scottish independence campaign has centered on currency. The Bank of England has said repeatedly that an independent Scotland can not use the pound sterling, except for an 18-month emergency period following a yes vote.
No one has sorted out what currency Scotland would use after that period, but there’s been some speculation that digital currency bitcoin might be a good fit.
That idea may seem far-fetched, but it has been posited in at least one high-profile financial forum by the assistant governor of Australia’s central bank and in a publication by a British think tank.
The country does have some experience in experimenting with currencies. During the 18th and 19th centuries, Scotland tested out private currencies in an unregulated banking system before ceding control to the Bank of England.
Under this free banking system, Scotland’s three largest private banks—the Bank of Scotland, Royal Bank of Scotland and the British Linen Bank— issued competing private currencies after the Bank of Scotland monopoly on note issues ended. These private notes were backed by banks’ gold reserves, while their supply was largely left up to market forces.
Adopting a cryptocurrency like bitcoin would similarly be a return to private money and could offer some benefits for Scotland, such as creating a flexible flow of private capital at relatively low cost, says Pete Rizzo, US editor for Coindesk, a digital currency news site.
But, he warns, the risks would outweigh those rewards. A central bank would have little to no control over setting monetary policy under bitcoin, since the digital currency’s supply is dictated by market forces. Instead of relying on a central bank to protect its value, bitcoin uses high-powered supercomputers and sophisticated cryptography at several unknown locations around the world.
A more plausible solution, Rizzo explains, would be for Scotland to use the underlying technology behind bitcoin to suit its needs and possibly create its own, more flexible digital currency. The move would be almost as radical as the one to break up the UK’s 307-year-old union.