After high-profile insolvencies of various crypto companies, ECB Director General Ulrich Bindseil feels compelled to share his views in a central bank blog post. After the speculative bubble, he suspects Bitcoin will fade into insignificance.
On the blog of the European Central Bank (ECB), the managing director published an opinion piece in cooperation with ECB adviser Jürgen Schaff. Its main objective is the “fall” of Bitcoin (BTC). After all, according to the authors, bitcoins are rarely used for legal transactions. A safer alternative are CBDCs. The words of the ECB carry weight. After all, the currency watchdog is the supreme regulator of eurozone banks and has a say in the financial regulation of the European Union. How strong are the central bank’s arguments?
end of the speculative bubble
According to the ECB Managing Director, after the November 2021 peak at USD 69,000 and the recent FTX crash, it is likely that no easing will follow. On the contrary: there is a high probability that Bitcoin will become useless. It was already predictable before the FTX debacle that Bitcoin price would fall well below $16,000. The apparent stabilization is an artificially induced last sigh of relief before the final fall.
Since 2010, hope for a steady increase in value has been fueled by misinformation. Admittedly, Bitcoin proponents market Bitcoin as a global, decentralized digital currency. But according to the director general of the ECB, technical shortcomings make cryptocurrency questionable as a means of payment. Since Bitcoin does not generate cash flow or pay dividends, it is also not suitable as an investment in the eyes of the authors. After all, Bitcoin has neither a productive advantage (like commodities) nor a social advantage, as is the case with gold, for example. Therefore, Bitcoin’s market valuation is based on pure speculation.
Bitcoin rarely used for legal transactions
Speculative bubbles depend on the influx of new money. Bitcoin has also repeatedly benefited from waves of new investors. The manipulations by individual exchanges or stablecoin providers during the early waves are well documented, but less so the stabilizing factors after the supposed bubble burst in the spring. Additionally, Bitcoin has never been used in any meaningful way for legal transactions in the real world.
For comparison, the estimated amount of money laundered around the world in one year is 2-5% of global GDP, or $800-2 trillion. Chainalysis statistics point to $14 billion worth of illegal cryptocurrency-based activity in 2021, or about 0.15% of the total volume. Of these, 8.6 billion USD can be attributed to money laundering activities. The fact that speculative transactions are also not “legal” activities must be qualified as questionable.
Regulations give a false sense of security
Regulators around the world are working on rules for the crypto world. It is a complex ecosystem ranging from stablecoins to various forms of lending that take place on decentralized blockchains. Indeed, according to the Director General of the ECB, lawmakers have eased the flow of funds. They support the supposed virtues of bitcoin and propose regulation that made crypto assets seem like just another asset class.
Current cryptocurrency regulation is characterized by misconceptions. The conviction that it is necessary at all costs to give space to innovation persists. Since Bitcoin is based on a new technology – DLT / Blockchain – the cryptocurrency has great potential for transformation. However, according to the authors, these technologies have so far created only limited value for society. It doesn’t matter how big your expectations are for the future. The use of a promising technology is not a sufficient condition for the added value of a product based on it. Cryptocurrencies are better classified by regulators as betting or gambling, Bindseil said in an email to Reuters.
The alleged regulatory sanction has also tempted the conventional financial industry to make it easier for customers to access Bitcoin. This concerns asset managers and payment service providers as well as insurers and banks. The entry of financial institutions suggests to small investors that investing in Bitcoin makes sense.
“The financial industry should be wary of the long-term downsides of encouraging Bitcoin investments – despite the short-term gains they might make.” – Ulrich Bindseil, Director General of the ECB
Competition for the digital euro?
It is worth mentioning the central role of Bindseil in the development and evaluation of a digital euro in the form of a central bank digital currency (CBDC). The European Central Bank (ECB) has been working intensively on digital money alternative projects since 2020. Issued directly by the central bank, a CBDC should ensure further efficiency gains and provide EU citizens with a means reliable digital payment. The digital euro would, on the one hand, facilitate transactions between large customers and, on the other hand, reduce dependence on FinTechs for digital payments.
The legal basis must be created at the beginning of 2023 by a first legislative proposal. Not least the reason for accelerating their existing plans is the rapid adoption of cryptocurrencies and stablecoins. Does the guardian of the currency feel threatened by new technology?
The apparent stabilization in bitcoin’s value is likely to be an artificially induced last gasp before the crypto-asset hits the road to irrelevance. #TheECBblog examines where bitcoin stands amid widespread volatility in crypto markets.
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— European Central Bank (@ecb) November 30, 2022