In an article published today on the European Central Bank’s website.Ulrich Bindseil (head of the ECB’s Market Infrastructures and Payments Division) and Jürgen Schaaf (advisor in the same division), announce Bitcoin’s “last gasp”. But as the beast has not yet cooled down, they warn of the new impetus that regulation could bring:
Bitcoin’s Last Stand
The value of bitcoin peaked at $69,000 in November 2021 before falling to $17,000 in mid-June 2022. Since then, the value has fluctuated around $20,000. For bitcoin supporters, the apparent stabilization signals a pause on the way to new highs. However, it is more likely to be an artificially induced last gasp before the road to irrelevance, something that was already foreseeable before FTX went bust and sent the bitcoin price well below $16,000.
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 sold as a decentralized digital currency worldwide. However, Bitcoin’s design and technological shortcomings make it a questionable means of payment: actual Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used in any meaningful way for legal transactions in the real world.
In the mid-2010s, the hope that Bitcoin’s value would inevitably reach new heights began to dominate the narrative. But Bitcoin is also unsuitable as an investment. It does not generate cash flow (like real estate) or dividends (like stocks), it cannot be used productively (like commodities) or provide social benefits (like gold). Therefore, Bitcoin’s market value is based solely on speculation.
Speculative bubbles depend on an influx of new money. Bitcoin has also repeatedly benefited from waves of new investors. Manipulations by individual exchanges or stablecoin providers, etc., during the first waves are well documented, but not so much the stabilizing factors after the supposed bursting of the bubble in the spring.
Large investors have the most incentive to maintain the euphoria. In the late 2020s, individual companies began to promote Bitcoin at the company’s expense. Some venture capitalists also continue to invest heavily. Despite the ongoing “cryptowinter,” venture capital investments in the cryptocurrency and blockchain sector amounted to $17.9 billion in mid-July.
Regulation can be misinterpreted as an endorsement
Large investors also fund lobbyists who advocate on their behalf to lawmakers and regulators. In the United States alone, the number of cryptocurrency lobbyists has nearly tripled from 115 in 2018 to 320 in 2021.
But lobbyists’ activities need a sounding board to have an impact. Indeed, lawmakers have sometimes facilitated the influx by supporting the supposed merits of Bitcoin and proposing regulation that made cryptoassets look like just another asset class. However, the risks of cryptoassets are not discussed by regulators. In July, the Financial Stability Board called for cryptoassets and markets to be subject to effective regulation and oversight commensurate with the risks they pose, under the doctrine of “same risk, same regulation.”
However, ratification of cryptoasset legislation has sometimes been slow in recent years, and implementation often lags behind. Moreover, different jurisdictions are not moving forward at the same pace or with the same ambition. While the EU has agreed on a comprehensive regulatory package with the regulation of Cryptoasset Markets (MiCa), the US Congress and federal authorities have yet to agree on consistent rules.
The current regulation of cryptocurrencies is partly conditioned by misconceptions. The belief that innovation must be given space at all costs stubbornly persists. Since Bitcoin is based on a new technology – DLT / Blockchain – it would have a high potential for transformation. Firstly, these technologies have so far created only limited value for society, whatever the expectations for the future may be. Secondly, the use of a promising technology is not a sufficient condition for a product based on it to have added value.
The alleged regulatory sanction has also tempted the conventional financial sector to facilitate customer access to bitcoin. This includes asset managers and payment service providers, as well as insurers and banks. The entry of financial institutions suggests to small investors that bitcoin investments are sound.
It should also be noted that the Bitcoin system is an unprecedented polluter. First, it consumes energy on the scale of entire economies. It is estimated that Bitcoin mining consumes electricity comparable to that of Austria per year. Second, it produces mountains of material waste. One Bitcoin transaction consumes hardware comparable to that of two smartphones. The entire Bitcoin system generates as much electronic waste as the entire Netherlands. This inefficiency of the system is not a defect, but a feature. It is one of the features that guarantee the integrity of the fully decentralized system.
Promoting Bitcoin poses a risk to the reputation of banks.
Since bitcoin does not appear to be suitable as either a payment system or a form of investment, it should not be treated as either in regulatory terms and therefore should not be legitimized. Similarly, the financial sector should be wary of the long-term detriments of promoting bitcoin investments, despite the short-term benefits they may reap. The negative impact on customer relations and reputational damage to the sector as a whole could be enormous once investors have suffered further losses.
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