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ECB reports Bitcoin fails to become global digital currency

Economists with the European Central Bank (ECB) contend that Bitcoin’s (BTC) limited usage disqualifies it as a legitimate form of currency.

Zero value

On Feb. 22, ECB director general for market infrastructure and payments Ulrich Bindseil, along with the bank’s advisor for market infrastructure and payments, Jürgen Schaaf, published a co-authored blog post titled: “ETF Approval for Bitcoin – the Naked Emperor’s New Clothes.” In this post, they elaborate on their skepticism towards Bitcoin, particularly in light of the recent approval of spot exchange-traded funds for the cryptocurrency by U.S. regulators in January.

In their analysis, Bindseil and Schaaf argue that Bitcoin’s value remains at zero, despite the claims of its disciples who see the recent rally as proof of its success. They highlight the inconvenient, slow, and costly nature of Bitcoin transactions and its prevalent use in illicit activities. According to them, Bitcoin’s limited legitimate usage outside of these activities undermines its potential to become a global decentralized digital currency.

The ECB economists also reference a previous blog post from November 2022 that debunked what they perceived as false promises associated with Bitcoin. They emphasize that Bitcoin has failed to establish itself as a global decentralized digital currency or a financial asset with a consistently rising value.

The ECB raises concerns about the societal and environmental risks associated with Bitcoin, especially in the event of another speculative bubble. They caution against inadvertent support from legislators that could further fuel the cryptocurrency’s growth without the necessary regulatory safeguards in place.

Despite its recent losses, the ECB maintains its ability to conduct effective monetary policy and ensure price stability. The central bank anticipates further losses in the coming years but reassures that it has the necessary capital reserves to mitigate any adverse impact on its operations.

In light of the increased interest expenses on liabilities and stagnant interest income on assets, the ECB disclosed its first annual loss in 20 years, totaling €1.3 billion ($1.4 billion) for 2023. Despite this setback, the central bank remains confident in its ability to navigate through the financial challenges and expects a return to profitability in the future.

The ECB’s decision not to distribute profits to eurozone national central banks for 2023 reflects its strategic approach to managing financial uncertainties and prioritizing long-term stability.

Dwindling fortunes

In response to rising inflation triggered by the COVID-19 pandemic and disruptions in energy access following Russia’s invasion of Ukraine, the ECB adjusted interest rates from negative territory to a record 4% between July 2022 and September 2023. This proactive measure aimed to counteract economic uncertainties and stabilize financial markets amidst geopolitical challenges.

Pro-crypto enthusiasts and organizations challenge these critiques, asserting that the euro is losing its purchasing power compared to cryptocurrencies. They argue that digital assets provide a more resilient alternative to traditional currencies in the face of economic volatility and inflationary pressures.

A recent report by Chainalysis revealed that only 0.34% of cryptocurrency transaction volume in 2023 was linked to criminal activity, highlighting the overall transparency and legitimacy of the digital asset ecosystem. In contrast, illicit transactions involving euros accounted for 1% of the EU’s GDP in 2010, underscoring the relative prevalence of illicit activities associated with fiat currencies.

Despite differing opinions on Bitcoin’s viability as a digital currency, the ongoing debates reflect the evolving landscape of financial technology and the complex interplay between traditional monetary systems and emerging digital assets. As central banks and regulatory authorities continue to monitor and assess the risks and opportunities associated with cryptocurrencies, the future of Bitcoin and other digital currencies remains subject to ongoing scrutiny and debate.

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