This is a re-post from an ECB blog. The original is here.
By Ulrich Bindseil and Jürgen Schaaf
The value of bitcoin peaked at USD 69,000 in November 2021 before falling to USD 17,000 by mid-June 2022. Since then, the value has fluctuated around USD 20,000. For bitcoin proponents, the seeming stabilization signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance – and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD16,000.
Bitcoin is rarely used for legal transactions
Bitcoin was created to overcome the existing monetary and financial system. In 2008, the pseudonymous Satoshi Nakamoto published the concept. Since then, Bitcoin has been marketed as a global decentralised digital currency. However, Bitcoin's conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions.
In the mid-2010s, the hope that Bitcoin's value would inevitably rise to ever new heights began to dominate the narrative. But 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). The market valuation of Bitcoin is therefore based purely on speculation.
Speculative bubbles rely on new money flowing in. Bitcoin has also repeatedly benefited from waves of new investors. The manipulations by individual exchanges or stablecoin providers etc. during the first waves are well documented, but less so the stabilising factors after the supposed bursting of the bubble in spring.
Big Bitcoin investors have the strongest incentives to keep the euphoria going. At the end of 2020, isolated companies began to promote Bitcoin at corporate expense. Some venture capital (VC) firms are also still investing heavily. Despite the ongoing "crypto winter", VC investments in the crypto and blockchain industry totalled USD 17.9 billion as of mid-July.
Regulation can be misunderstood as approval
Large investors also fund lobbyists who push their case with lawmakers and regulators. In the US alone, the number of crypto lobbyists has almost tripled from 115 in 2018 to 320 in 2021. Their names sometimes read like a who's who of US regulators.
But lobbying activities need a sounding board to have an impact. Indeed, lawmakers have sometimes facilitated the influx of funds by supporting the supposed merits of Bitcoin and offering regulation that gave the impression that crypto assets are just another asset class. Yet the risks of crypto assets are undisputed among regulators. In July, the Financial Stability Board (FSB) called for crypto assets and markets to be subject to effective regulation and supervision commensurate with the risks they pose - along the doctrine of "same risk, same regulation".
However, legislation on crypto-assets has sometimes been slow to ratify in recent years - and implementation often lags behind. Moreover, the different jurisdictions are not proceeding at the same pace and with the same ambition. While the EU has agreed on a comprehensive regulatory package with the Markets in Crypto-Assets Regulation (MICA), Congress and the federal authorities in the US have not yet been able to agree on coherent rules.
The current regulation of cryptocurrencies is partly shaped by misconceptions. The belief that space must be given to innovation at all costs stubbornly persists. Since Bitcoin is based on a new technology - DLT / Blockchain - it would have a high transformation potential. Firstly, these technologies have so far created limited value for society - no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it.
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.
It’s also worth noting that the Bitcoin system is an unprecedented polluter. First, it consumes energy on the scale of entire economies. Bitcoin mining is estimated to consume electricity per year comparable to Austria. Second, it produces mountains of hardware waste. One Bitcoin transaction consumes hardware comparable to the hardware of two smartphones. The entire Bitcoin system generates as much e-waste as the entire Netherlands. This inefficiency of the system is not a flaw but a feature. It is one of the peculiarities to guarantee the integrity of the completely decentralised system.
Promoting Bitcoin bears a reputational risk for banks
Since Bitcoin appears to be 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 - despite short-term profits they could make (even without their skin in the game). 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.
* Ulrich Bindseil is Director-General, Markets Infrastructure & Payments. Jürgen Schaaf is Adviser, Markets Infrastructure & Payments, both at the European Central Bank. This is a re-post from an ECB blog. The original is here.
48 Comments
True. Bitcoin has no value whatsoever. It’s not not physical like a precious metal, it’s not backed by any government, like currency, and it’s not backed by any tangible asset like stocks. Therefore it’s worth nothing. We are seeing it now on its slow descent to zero. The technology behind it is rubbish, and anyone who has proper experience in IT systems knows this. Too much energy, too much work, too easily hacked, and the whole system essentially run by scammers and hackers. The whole thing is a joke really. It amazes me that people try to talk rationally about it. People have been sucked in badly. It’s happened many times in history and now it’s happened again. We never learn. One good thing about it is they say crims have used it because you can’t trace the transactions. If that is even true, that’s great, hopefully a bunch of crims are sitting on a pile of bit nothings that will soon be worth exactly nothing. I do feel a bit sorry for people that did gamble on this, as this ponzi is worse than the housing market. At least with the housing market you still have the physical asset left after the market crashes.
too easily hacked
Who told you this? Granny Herald?
BTC has never been hacked and it becomes more unlikely every passing minute.
More interesting question is how long the Euro will be around for. Germany must be close to breaking point having to carry the can for the other basket cases.
Not the coins themselves but often their offsite storage.
So now it's only good being cold stored, offline. Sorta defeats the purpose of a digital currency.
There's problems in Europe for sure, but there is some salvage value for corporations like Louis Vuitton, or Porsche.
Maybe I'm too much of a materialist.
Not the coins themselves but often their offsite storage.
Huh? How do you "hack" private keys? Almost impossible, unless you perhaps keep a seedphrase online and a hacker is able to sift through and piece it all together. Needle in haystack stuff.
Might be a good idea to study the fundamentals of how BTC works.
Offsite = online. In the "cloud".Like an exchange. There's a good history of them either being hacked or defrauded, with little to no recourse. So I believe the recommended storage method is now cold storage.
So not "hacking" as such, but that's how a layperson might view it. Less secure and less widely accepted than say, a credit card anyway.
Offsite = online. In the "cloud".Like an exchange.
Nothing is "in the cloud." Yes, exchanges can be hacked. But people should know this. Assets should not be kept on exchanges, except in limited amounts that you can afford to lose.
And that's just like a hot wallet. Only keep what you can afford to lose in it. Just like a bill wallet.
I can do everything with my existing money format. Cash, online, down the road with a card, and across the planet.
That's a service so I get charged a nominal fee, but it requires very little extra effort on my behalf. That fee seems cheaper than using crypto.
So therein is the fundamental flaw in widespread uptake, most people can't be arsed DIYing their financial transactions. It's kinda partly why banks exist in the first place......
Probably. Easy to airdrop more liquidity into certain accounts, or to burn tokens when needed.
And of course tax collection will be easy.
But as long as you trust the Govt it will all be ok.
Or will you hedge your bets and seek an alternative place to store some value ?
Or perhaps the current system, and his role in it, have become so ingrained within his identity that he's compelled to defend it at any cost.
The bureaucrat should understand BTC doesn't necessarily replace fiat currency. People's thinking can be quite binary and BTC is increasingly seen as a threat to the status quo. That might be a little misguided. Imagine a world where the central banks tell you what you can or cannot own. Given that central banks are supposedly 'independent and sovereign', they don't have executive power to enforce people to behave as they wish. Mind you, it seems we're hurtling to this kind of dystopia if people don't exercise their free will.
The powers that be must be getting worried about something. Maybe CBDC development isn't going well.
It's absolutely not Bitcoins last stand.
As soon as the banks release a CBDC it's DEAD. You simply have an non compatible method of exchange between the two and its game over, literally overnight the price of Bitcoin will go to 10cents. No idea why people cannot see this, its just the race between VHS and Beta all over again.
Same energy as all the archeologists affronted by the recent Netflix series Ancient Apocalypse.
https://news.artnet.com/art-world/archaeologists-graham-hancocks-ancien…
Since Bitcoin appears to be 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.
Wonder what this means. That the ECB will 'outlaw' BTC? Wonder what the European citizens will think of that. And will it even be possible in 'democratic' nation states? Whether people want to own BTC or not is beside the point, but the ruling elite needs to be kept in check.
The SBF interview was on the whole unrevelatory for those who keep informed. But one point was quite interesting -- SBF mentioned about the inability to skirt around regulatory compliance in Japan. That means that customer's digital assets remain safe (even though it's good practice to be your own bank through keeping assets in cold storage) and it doesn't really matter what an ECB bureaucrat says or thinks. The motivation to redefine money as something that can't manipulated by central banks is because of these people.
Being anchored in a sound regulatory environment may be its best bet. If there is one or more jurisdictions that can accommodate (regulate etc) BTC & is trusted by the many, then you may have the foundation to grow the concept. Japan is as trustworthy as any in my view. America also. Maybe it could be a new role for London? Whichever way it goes, there will have to be some sort of global agreement in place, but what are the chances of that coming from a group of sovereign govts?
There may need to be a summit convened by all the trustworthy types, before the less trustworthy types get in ahead of them. That & lots of cheap energy are probably the keys.
I have been through the KYC process for opening a corporate trading account on a crypto exchange in Japan. Took 4 months and besides notarized documentation, it also included an interview via Zoom. Knowledge and understanding of self custody were asked in the interview. Very rigorous. Japan and Singapore are well ahead of the curve.
100%. I'm always interested to read (and welcome) a counter argument to watch for headwinds, and see if my thesis might alter. This doesn't make a single point that hasn't been countered or completely debunked hundreds of times over the past decade. This regurgitated drivel is also presented by someone with a clear bias given his position at the European central Bank. Not surprising to see that after all this time, they still haven't actually made any effort to understand the technology beyond a herald article surface level. Bitcoin is not going away. The rest of the crypto ecosystem is a different story, the death of most tokens (soon to be classified as securities...) is inevitable.
I can see this has already been added as the 467th Obituary for bitcoin on the official tracking page.
I'm sure he'll be right this time though. Surely.
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