ECB: Bitcoin should not be legalized

“Bitcoin's Last Stand” is the blog's title that speaks volumes about the authors’ attitude towards the legendary cryptocurrency. It would seem that the hint is clear. But let's focus on the reasons behind Bindseil and Schaaf's skeptical claims.

The European Central Bank is convinced that after numerous ups and downs in Bitcoin's price, the long-awaited stabilization at ±$20,000 is not a breather on the way to new heights, but an “artificially induced last gasp.” Why don't bankers believe in Bitcoin's relevance and predict its imminent disappearance?

Bitcoin is not a means of payment

Though originally positioned as a decentralized global digital currency, Bitcoin has some shortcomings that prevent it from becoming a means of regular payments.

Real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions.

Bitcoin is not a good investment

Investing in Bitcoin was supposed to take cryptocurrency to a whole new level. However, bankers believe that it is absolutely not suitable as an investment. 

With an investment strategy, investors generate money, dividends, or direct profits from the use of various assets. The situation with Bitcoin is somewhat different: the ECB says that its market value is based purely on speculation. At the same time, the big Bitcoin investors, including many venture capital funds, constantly keep the euphoria going.

Speculative bubbles rely on new money flowing in. Bitcoin has also repeatedly benefited from waves of new investors.

Bitcoin is not “just another asset class”

Legislation that is being developed in different countries to regulate cryptocurrencies is slow to ratify, and even slower to implement. Another complicating factor is that the speed of decision-making and understanding of the crypto industry varies considerably in different jurisdictions. For example, while the EU has already developed clear rules for the crypto market (MiCA), U.S. authorities are still unable to agree on this issue.

The risks inherent in digital currencies require effective regulation and supervision. The number of crypto lobbyists in the U.S. has almost tripled between 2018 and 2021. They promote Bitcoin and seek to shape it as a traditional asset class. As a result, cryptocurrency is coming to retail investors as a promising investment. However, this should not be the case.

The supposed sanction of regulation has also tempted the conventional financial industry to make it easier for customers to access bitcoin. This concerns asset managers and payment service providers as well as insurers and banks. The entry of financial institutions suggests to small investors that investments in Bitcoin are sound.

Bitcoin is an inefficient system

Bindseil and Schaaf claim unprecedented pollution associated with the Bitcoin system. According to ECB officials, bitcoin mining consumes as much energy as the entire country of Austria, and the amount of e-wastes is comparable to that of the Netherlands.

This inefficiency of the system is not a flaw but a feature. It is one of the peculiarities to guarantee the integrity of the completely decentralised system.

Bitcoin bears a reputational risk for banks

The blog's authors are not dragging their feet: Bitcoin should not be legitimized. Banks shall be aware of the consequences of promoting crypto investments, because retail investors will sooner or later lose their money.

The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses.