What the European Central Bank Got Wrong about Bitcoin

By Andrew Saks, The People’s SCE

Financial services gatekeepers, legacy providers, and regulators have been critical of crypto since the dawn of digital currency. The vitriol intensified when the European Central Bank (ECB) itself took a swipe at Bitcoin in a damning blog in November 2022, titled “Bitcoin’s last stand.”

This is not the first attempt to ring Bitcoin’s death knell. However, the ECB is not just any naysayer. As the issuer of the Euro, the de facto legal tender for most European Union member states, the ECB is one of the world’s most prominent monetary institutions. Thus, its pronouncements on Bitcoin sent shockwaves through the industry. 

The aforementioned blog makes several incendiary allegations. According to it, Bitcoin has no legal utility, no social value, is an “unprecedented polluter,” and poses reputational risks for banks, among others. Are these allegations true, or merely an attempt to keep the status quo? Several points demand a response.

Bitcoin is rarely used for legal transactions

Crypto is often equated with illegality, yet only 2.1% of the world’s crypto is used for unlawful activity, according to The Chainalysis 2021 Crypto Crime Report. That’s a tiny percentage of otherwise legitimate use.

The real story is that Bitcoin is not only legal but is being legitimated as a means of payment and even legal tender. It also presents an economic opportunity to SMEs seeking to diversify their income and avoid revenue losses which are unavoidable due to fees imposed by legacy financial services providers.

Some of the most recent large-scale crypto adoption projects include legislative actions embracing crypto in countries such as Brazil, Lithuania, Singapore, and the United Kingdom. Across the globe, national regulators are starting dialogues with the industry on how to fairly regulate cryptocurrencies and exchanges.

In El Salvador alone, 70 percent of the country’s population is using Bitcoin to make purchases, in shops and online, and participate in the world economy. The method by which El Salvador adopted Bitcoin as a legal tender may have been questionable, and the ensuing situation in which it was managed led to the country facing plummeting economic growth and a high deficit. However, the mere fact that Bitcoin became a national currency and empowered a previously excluded population who could then join the global economy clearly demonstrates a use case otherwise ignored by Bitcoin’s detractors.

As with any emerging technology, the message is simple: the ECB and other regulators need to embrace change and engage in a closer dialogue with industry actors, both large and small.

Real Bitcoin transactions are cumbersome, slow and expensive 

They are not — in fact, they are almost free and faster than fiat transactions. But unlike traditional banking, Bitcoin and other cryptocurrencies are decentralized, making them freer – and beyond the scope of legacy financial institutions. More importantly, they empower people to conduct their everyday business on a peer-to-peer basis, in an inclusive ecosystem with low costs and few barriers to participation. What’s missing? The middleman of legacy banking, with associated inflation, and debt. Also absent, are transfer delays and banks’ exorbitant fees for cross-border transactions. That’s cumbersome – and it is courtesy of the banks, not Bitcoin.

The market valuation of Bitcoin is based purely on speculation

This is one of the most common misconceptions about cryptocurrencies. It is incorrect to assume that Bitcoin and other cryptocurrencies are vehicles for gambling. On the contrary, they are viewed by regulatory authorities, including the U.S. Securities and Exchange Commission as legitimate stores of value. Furthermore, not only are Bitcoin and other cryptocurrencies a store of value, but their technological purpose extends far beyond use as a spending power currency.

This is due to Blockchain topography, which allows fully distributed, smart contracts, and distributed ledgers to function. In turn, these are being used by businesses small and large, to streamline operations, increase transparency and eliminate tampering by third parties. These improvements are possible because transactions are distributed across the entire peer-to-peer network, not a centralized authority. That is new. That makes banks and other legacy financial services providers nervous. But it is not gambling.

Regulation can be misunderstood as approval 

Here the ECB gives a very broad overview of how cryptocurrency is regulated or viewed by regulators as an asset class. However, what they did not say is that individual and well-respected regulators within Europe, and some of them within the European Union, were some of the very first to regulate cryptocurrency as an overall tradable asset and give specific licenses to wallets and e-money platforms. Estonia, Lithuania and Latvia – all European Union member states – lead the world in the creation of digital societies. At the centre of that digital society are digital assets and fully licensed regulated e-wallet solutions.

Bitcoin is a “polluter”

The ECB post also alleged that “the Bitcoin system is an unprecedented polluter.” While energy consumption is often cited by critics, the ECB’s post provides no relevant statistics. 

Whilst power use is a consideration, the use of decentralized peer-to-peer networks for business means less travel, more online work and greater efficiency – all of which amount to less energy use. Conversely, the carbon footprint relating to the manufacture and vehicular distribution of paper cash and coins was not quantified.

Promoting Bitcoin bears a reputational risk for banks 

The reality is that the decentralized economy which allows members of the public to take their own futures into their own hands is an existential threat to the European Central Bank, and all other central and commercial banks. If the public and the world of business take part in building and using its own non-hierarchical decentralized ecosystem for everyday life, central banks, and government departments cannot coerce them or set terms that only benefit said institution.

A particular dichotomy relating to this is that just two months ago, in October this year, the European Council approved the new Markets in Crypto-Assets (MiCA) Regulation, one of the first attempts globally at comprehensive regulation of cryptocurrency markets. The MiCA regulations are a directive initiated by the European Union’s top authorities and have been comprehensively designed and set up by the very authorities in the jurisdiction where the ECB is the central bank.

No social benefits 

Finally, the ECB’s allegation that Bitcoin operates devoid of social benefits misses the mark entirely. The reality is that unlike traditional banking structures today, Bitcoin and other cryptocurrencies help millions of people protect their wealth, regardless of how large or small. 

Overall, the ECB’s post was the most high-profile and detailed dig at cryptocurrencies in recent history, and one conducted by one of the largest central financial institutions in the world. And it was misleading on several fronts. 

At the same time, crypto – and FinTech more broadly – presents a great economic opportunity for Europe. For example, in each of the seven largest European economies, measured by GDP, at least one FinTech firm ranks among the five top banking institutions (McKinsey, October 2022: Europe’s fintech opportunity). Now try to quantify the economic potential for European countries if they were to embrace cryptocurrencies; the number of jobs these could create, and the number of SMEs that could benefit from virtually cost-free cross-border global financial transfers. 

We live in truly polarizing times and are at a critical turning point. Europe has the opportunity to embrace new technologies and experience growth, or block innovation and see an economic slowdown.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any entities which the author represents.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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