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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.”
The two economists tee off by rebuking U.S. regulators who in January approved spot exchange-traded funds (ETFs) for Bitcoin.
“For disciples, the formal approval confirms that Bitcoin investments are safe and the preceding rally is proof of an unstoppable triumph. We disagree with both claims and reiterate that the fair value of Bitcoin is still zero,” Bindseil and Schaaf write.
Transactions involving Bitcoin are still inconvenient, slow, and costly, they argue. Furthermore, they contend that Bitcoin is still primarily utilized for payments in illicit activities, with minimal legitimate use outside this realm.
As a result, Bitcoin fails to fulfill its promise of becoming a global decentralized digital currency due to its susceptibility to fraud and manipulation, they said.
The authors referenced a previous ECB blog post from November 2022 that debunked what they maintain are the false promises of Bitcoin.
In their analysis, they emphasized that Bitcoin has failed both as a global decentralized digital currency and as a financial asset with a continually rising value.
The ECB also cautioned against the risks to society and the environment if Bitcoin were to experience another bubble, especially if supported by legislators who might inadvertently encourage its growth instead of imposing necessary regulations.
The blog post generated significant attention on social media from those within the crypto industry.
The ECB is not the only financial authority to question Bitcoin’s potential as a valuable digital currency.
Neel Kashkari, President of the U.S. Federal Reserve Bank of Minneapolis, recently expressed skepticism about Bitcoin’s ability to serve as an effective hedge against inflation.
Kashkari has argued that Bitcoin is merely considered another risky asset with no practical use in real economic scenarios. See below.
Pro-crypto enthusiasts and organizations routinely clap back at skeptics, insisting that the euro is losing purchasing power against cryptocurrency.
A recent report by Chainalysis claimed that 0.34% of cryptocurrency transaction volume in 2023 was linked to criminal activity.
The data firm then contrasted that with illicit transactions involving euros, which accounted for 1% of the EU’s GDP or €110 billion in 2010.
Dwindling fortunes
The ECB recently disclosed its first annual loss in 20 years, amounting to €1.3 billion ($1.4 billion) for 2023. This loss primarily stemmed from increased interest expenses on key liabilities, while interest income on assets lagged due to fixed rates or long maturities.
Despite the loss, the ECB cited substantial capital and revaluation accounts totaling €46 billion by the end of 2023. The central bank also anticipates further losses in the coming years, but it reassured that these losses would not hinder its ability to conduct effective monetary policy, with a return to sustained profits expected afterward.
The central bank adjusted interest rates from negative territory to a record 4% between July 2022 and September 2023 in response to increasing inflation triggered by the COVID-19 pandemic and the disruption in access to Russia’s energy following its invasion of Ukraine.
The ECB affirmed its ability to operate effectively and fulfill its mandate of maintaining price stability despite losses. It intends to offset this loss against future profits and has decided not to distribute profits to eurozone national central banks for 2023.
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