Bitcoin on the “Road to Irrelevance”: ECB
Posted by Colin Lambert. Last updated: December 1, 2022
The latest offering from the European Central Bank’s blog – which, as is standard, reflects the individual writers’ views rather than those of the central bank itself – is bitingly critical of Bitcoin and its future, arguing that rather than a positive sign, the current stabilisation in the price of the cryptocurrency is “an artificially induced last gasp before the road to irrelevance”.
The authors, Ulrich Bindseil, director general of the ECB’s market infrastructure and payments team; and Jürgen Schaaf, an advisor to that team, argue in the post, entitled Bitcoin’s Last Stand, that Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment, adding, “real Bitcoin transactions are cumbersome, slow and expensive”.
Warming to their theme, the authors then argue that Bitcoin is also not suitable as an investment. “It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold),” they write. “The market valuation of Bitcoin is therefore based purely on speculation.”
Noting that, thanks to “manipulation by individual exchanges or stablecoin providers”, Bitcoin has repeatedly benefitted from waves of new investors, the blog also hints that the large long-term holders of the cryptocurrency have played a role in the recent stabilisation after the collapse from $69,000 over the course of the year. “Big Bitcoin investors have the strongest incentives to keep the euphoria going,” the authors argue.
Observing that the number crypto lobbyists in the US alone almost tripled from 2018 to 2021, the authors also take aim at lawmakers and regulators that have helped give the impression that crypto assets are just another asset class. They suggest that global regulators do not share this view, “the risks of crypto assets are undisputed among regulators” and feel that current rules, where they exist, are “partly shaped by misconception”, and, “The belief that space must be given to innovation at all costs stubbornly persists.”
While noting that being based upon new technology, DLT/Blockchain, Bitcoin could have a high transformation potential, the authors argue this is far from the reality. “Firstly, these technologies have so far created limited value for society – no matter how great the expectations for the future,” they write. “Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.”
Those TradFi firms that have embraced crypto assets are not spared either, with the authors writing, “The supposed sanction of regulation 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 investments in Bitcoin are sound.”
Inevitably, the post also takes aim at Bitcoin’s role as a polluter, observing that miners consume the equivalent amount of electricity as Austria and that one Bitcoin transaction consumes the hardware comparable to that of two smartphones. It adds that the entire Bitcoin system creates the same amount of e-waste as the Netherlands. “This inefficiency of the system is not a flaw but a feature,” the authors write. “It is one of the peculiarities to guarantee the integrity of the completely decentralised system.”
Concluding their argument, the authors contend that because Bitcoin is neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and “thus should not be legitimised”.
Similarly, the financial industry should be wary of the long-term damage of promoting Bitcoin investments,” they add. “The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses.”