Yves Mersch, a member of the executive board of the European Central Bank (ECB), speaking at the Bargeld-symposium of the Deutsche Bundesbank in Frankfurt, has come down firmly against Bitcoin. Whereas, this will probably not come as much of a surprise to most, he would seem to have done this, in the context of, an attempt to sell the idea of the Euro as an international currency of choice.
“Virtual money can, like cash, be used to buy real goods and services. It is “digital cash”. Bitcoin is the best-known example. This cross-border virtual payment system was launched privately in 2009 in response to the international financial crisis, offering money that was independent of central banks and commercial banks. Bitcoins are “mined” in a decentralised way in a computer network and managed in the same fashion. Their special feature is that payments are made directly between the participants without a bank as an intermediary. The elimination of any bank charges achieved in this way is often claimed to be an advantage.
However, exchange rate losses can quickly cancel out this advantage. For example, the Bitcoin exchange rate, determined by supply and demand, slumped from €170 to €70 in April 2013 after the Bitcoin exchange temporarily suspended trading and triggered panic selling. Further price falls occurred after hacker attacks, when Bitcoins were stolen on several occasions. This happened most recently in February 2014 and led to the winding-up of Mt. Gox. Since the Bitcoin trading platforms are not regulated, 100% losses are also possible. The absence of a clear legal framework also leads to considerable legal uncertainty among Bitcoin users. Although interested parties can very easily download the application for Bitcoin, they neither understand how this payment system works exactly, nor the risks they run when using it. Worldwide, there are probably a maximum of two million Bitcoin users, and only a few thousand businesses and service providers which accept bitcoins. For that reason, bitcoins have also been referred to as a “regional currency of the internet”.
Mr. Mersch, of the ECB, goes on to criticize ‘local currencies‘ that have come into existence. These, local, currencies were established to promote local trade and the ECB feels that their use has the potential to regionalize and stagnate growth and development. He sees the Euro as the only acceptable currency and store of value within the EU area.
“Due to the very limited use of virtual and regional currencies they compete neither with the banking sector’s payment systems nor with euro banknotes. The examples illustrate the superior characteristics of euro cash: its value is guaranteed by the ECB and the national central banks of the Eurosystem and it can be used throughout the euro area – and beyond – for payments. The payment process requires no infrastructure and settlement takes place in a logical second; the creditworthiness of the contracting party does not play a role.
In the light of the steady growth of euro cash in circulation, it is clear other means of payment are not displacing it, but that, at most, a shift is under way from the payment function to store-of-value function. The euro owes its international role to its reputation as a stable anchor of value. The debt crises of recent years have done little damage to its good reputation.”
Now, I take issue with some of the “factual” claims that the ECB makes. Particularly, there are ” a maximum of two million Bitcoin users and a few thousand businesses and service providers which accept bitcoins.” Accepting that there are 16 Billion Euro banknotes in circulation, with a face value of just under 1 Trillion Euro, a vast currency, in comparison, however, Bitcoin is tiny. However, the question must be asked of the ECB, as it is often asked of Bitcoin, “What percentage of the Euro’s in circulation are believed to be in the hands of criminals?”
Now, I fully accept that this is a silly question. When you give someone any unit of currency you give them the ability to make a choice, whether they buy buckets or bazookas is a matter entirely for themselves, if they choose to spend their money on drugs and prostitutes, that is a matter of choice. There may be a hidden cost inherent in the transaction, you may well get arrested. Again, you acted to express your opinion through choice.
The ECB is not an organization that likes people making ‘uninformed’ choices. They have vast powers for an unelected organization, and case to point, refused recently to approve a budget for Greece until a financial program was agreed. This program included an ECB approved economist taking over the government of Greece, deposing a sovereign government in the process.
The Euro, under the oversight of the ECB, is the currency of legal tender in the Eurozone. It is the currency that must be taken in settlement of a debt. There are, however, many shops throughout Europe that will take no Euro note above €20 in settlement of a debt due to the level of forgeries. The Euro is strong, so why does it perceive cryptocurrencies to be a threat?