Bitcoin’s Limited Usage Disqualifies It as a Legitimate Currency, Say ECB Economists
Economists from the European Central Bank (ECB) have argued that Bitcoin’s limited usage prevents it from being considered a legitimate form of currency. In a blog post titled “ETF Approval for Bitcoin – the Naked Emperor’s New Clothes,” ECB director general for market infrastructure and payments Ulrich Bindseil and advisor Jürgen Schaaf criticized U.S. regulators for approving spot exchange-traded funds (ETFs) for Bitcoin.
The economists disagreed with claims that Bitcoin investments are safe and that the preceding rally is evidence of its success. They maintained that the fair value of Bitcoin remains zero due to its inconvenient, slow, and costly transactions. They also highlighted that Bitcoin is primarily used for illicit activities, with minimal legitimate use outside of this realm. This susceptibility to fraud and manipulation undermines its potential as a global decentralized digital currency.
The ECB economists referenced a previous blog post from November 2022 that debunked the false promises of Bitcoin. They emphasized that Bitcoin has failed both as a global decentralized digital currency and as a financial asset with continually rising value.
Pro-crypto enthusiasts and organizations often argue against these criticisms, asserting that the euro is losing purchasing power compared to cryptocurrency. However, Chainalysis recently reported that only 0.34% of cryptocurrency transaction volume in 2023 was linked to criminal activity, while illicit transactions involving euros accounted for 1% of the EU’s GDP in 2010.
Dwindling Fortunes for ECB
The ECB recently disclosed its first annual loss in 20 years, amounting to €1.3 billion ($1.4 billion) for 2023. This loss was primarily attributed to increased interest expenses on key liabilities, while interest income on assets lagged due to fixed rates or long maturities.
Despite the loss, the ECB reported substantial capital and revaluation accounts totaling €46 billion by the end of 2023. The central bank expects further losses in the coming years but reassures that these losses will not hinder its ability to conduct effective monetary policy. It anticipates a return to sustained profits afterward.
In response to increasing inflation caused by the COVID-19 pandemic and the disruption in access to Russia’s energy following its invasion of Ukraine, the ECB adjusted interest rates from negative territory to a record 4% between July 2022 and September 2023.
The ECB remains confident in its ability to operate effectively and fulfill its mandate of maintaining price stability despite the losses. It plans to offset this loss against future profits and has decided not to distribute profits to eurozone national central banks for 2023.
Hot Take: Bitcoin’s Legitimacy as a Currency Remains Controversial
While economists from the European Central Bank argue that Bitcoin’s limited usage disqualifies it as a legitimate form of currency, pro-crypto enthusiasts and organizations continue to advocate for its potential as an alternative financial system. The debate surrounding Bitcoin’s legitimacy as a currency is likely to persist as its adoption and acceptance continue to grow.
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