Crypto Warning: Bitcoin "On the Road to Irrelevance"
Bitcoin’s value is artificially propped up and
shouldn’t be legitimized by regulators or financial firms as it’s more akin to
gambling, the European Central Bank said.
In an unusually outspoken criticism of cryptocurrency,
the ECB report said it was unsuitable as a payment method and denied its use as
an investment vehicle.
Bitcoin’s value peaked at $69,000
(£57,000) in November 2021 before falling to its current price of $17,800. Its
supporters believe it will rise again after the turmoil caused by the collapse
of cryptocurrency exchange FTX.
The ECB authors said any revival will be
“an artificially induced last gasp before the road to irrelevance”.
Global regulators
are drafting rules for the crypto world, a complex world that ranges from
stablecoins — ostensibly backed by conventional currencies — to forms of lending
on the blockchain or digital ledgers that underpin those coins.
UK government ministers said they want
the UK to become a global crypto hub by allowing stablecoin regulation. The
Prime Minister, Rishi Sunak, while he was Chancellor, even commissioned a project
to produce one “NFT (non-fungible token) for Britain” – a digital artwork
using blockchain technology to produce art like Bitcoin.
The authors of the ECB report, which
include Ulrich Bindsell, its director for market infrastructure and payments,
were scathing, saying bitcoin’s “conceptual design and technological flaws make
it questionable as a means of payment.”
“Real bitcoin transactions are
cumbersome, slow and expensive,” they say.
They have labeled the currency a
“speculative bubble” that relies on new money pouring in and said it has
repeatedly benefited from waves of new investors drawn to “the manipulations by
individual exchanges or stablecoin providers.”
The report claimed that big investors
also fund lobbyists “who make their case with lawmakers and regulators.” In the
US, the number of crypto lobbyists “nearly tripled from 115 in 2018 to 320 in
2021.”
It warned the financial industry of the
long-term damage of encouraging Bitcoin investment, saying that “the negative
impact on customer relationships and reputational damage for the entire
industry could be enormous.”
More of business
They accused politicians of
“facilitating” a cash inflow by publicly endorsing Bitcoin’s purported virtues
while making it appear that crypto assets like Bitcoin are “just another asset
class” like stocks, bonds, or real estate, even though the Risks are
“undisputed among the supervisory authorities”.
Despite calls for better regulation, it
is a long time coming, they warn. The EU has agreed a comprehensive regulatory
package with the Markets in Crypto-Assets Regulation (MICA), but US authorities
have not yet been able to agree on rules.
The prospect of regulation has “enticed
the traditional financial industry” to make Bitcoin easier for more customers
to access. The entry of financial institutions suggests to retail investors
that investing in Bitcoin is sound, they warn.
They also believe that the new
technologies behind bitcoin and broader digital financial innovations – like
blockchain – “so far have created limited value for society – no matter what
the expectations for the future.”
They also refer to the Bitcoin system as
an “unprecedented polluter.”
“First, it consumes energy on the scale
of entire economies. It is estimated that bitcoin mining consumes electricity
comparable to Austria per year. Second, it produces mountains of hardware junk.
A 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 defect but a feature. It is one of the
distinctive features to ensure the integrity of the fully decentralized
system.”
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