Bitcoin, the poster child for digital currencies, is proving something of a headache for central banks. Should they ban it, regulate it, embrace it, undermine it or just ignore it?
Their best bet would be to let Darwinism take its course, and resist the regulatory impulse to interfere with either Bitcoin's survival or demise. And, if it lives, they should step aside and celebrate innovation rather than try to block its progress.
Bitcoin has always posed a challenge to central bankers' exclusive power to mint money, but it's never been clear how the official guardians of monetary stability would respond to it.
Reports published in recent weeks by the European Central Bank and the Bank of England suggest they're scrambling to keep all of their options open. Schizophrenia is setting in.
The ECB's kaleidoscopic list of central bank views on what Bitcoin is or isn't illustrates the quandary. Sweden and Finland deny it is a currency at all; the latter also disqualifies it as an instrument of payment, while the former taxes it as an asset.
Germany regards it as a unit of account, akin to the International Monetary Fund's Special Drawing Rights, so not legal tender but still a form of financial instrument.
The Federal Reserve regards the technology as not "sufficiently mature," but worthy of "further exploration and monitoring"; it also says it doesn't have the right to regulate digital money.
The ECB's new report suggests there are as many as 500 different virtual currency platforms, mostly tweaks of Bitcoin's open-source system. The bank is highly sceptical, however, of whether anyone is using anything other than Bitcoin to actually make payments. Yet even if it commands more than 80 per cent of the virtual currency market, as the ECB estimates, Bitcoin remains a minnow in the world of finance.
The ECB contrasts the 69,000 daily Bitcoin transactions globally with the 274 million non-cash payment transfers each day just in the European Union. It also highlights that in both number and volume of transactions, Bitcoin is dwarfed by regular payment systems.
The ECB warns that digital currencies currently have fundamental flaws, including the lack of refund rights if your account makes payments you didn't authorise, whether by fraud or accident, plus the existence of what it calls "scamcoins" designed exclusively to bilk participants.
The sooner people give up the hope that bitcoin will skyrocket in price, the sooner they will be willing to spend bitcoins in everyday life, the way they now spend dollars. The quicker bitcoin as an investment dies, the quicker bitcoins as currency can come to life.
It also acknowledges why users might like Bitcoin. Cheaper transaction costs, a true disregard for geographical borders, faster settlement and the perceived anonymity of the system all offer advantages over traditional methods of moving money.
A Bank of England report published last week follows the central bank orthodoxy of denying that digital currencies can count as money because of their minuscule role in buying and selling goods: "Data suggest that digital currencies are primarily viewed as stores of value - albeit with significant volatility in their valuations - and are not typically used as media of exchange."
Value down 70pc
The way the world is using Bitcoin may hasten its demise. Its value has rallied 48 per cent since January's lows, but that still leaves Bitcoin down 70 per cent since its peak just over a year ago.
As my colleague Noah Smith argued in January, money is distinct from a risky long-term asset. People don't expect the value of money to increase in value over time, and part of the definition of what constitutes money versus an investment is that money is a medium of exchange. You buy things with money; you don't buy stuff with your investments.
As Smith put it: "The sooner people give up the hope that bitcoin will skyrocket in price, the sooner they will be willing to spend bitcoins in everyday life, the way they now spend dollars. The quicker bitcoin as an investment dies, the quicker bitcoins as currency can come to life."
Nevertheless, the surprising conclusion of the Bank of England report is that it might consider introducing its own version of Bitcoin. The technology involved "may have significant promise," it said. "A central bank-issued digital currency might be a more easily controlled means of settlement and exchange," said Michael Kumhof, a senior research advisor at the central bank.
That proposal sums up how central banks are likely to deal with Bitcoin in the future. They'd clearly prefer virtual currencies to die a natural death. Absent that outcome, they'll attempt to drag the digital platforms into existing oversight frameworks, and smother them in the suffocating embrace of rules, codification and administration.
Ensnaring digital currencies in a web of officialdom would destroy their principal attraction to users - the fact that they're not part of the existing financial infrastructure, operating instead in a digital hinterland removed from government interference. That would be a pity.