The EU's Department of Economic, Scientific and Quality of Life Policy has recently published a report entitled “Virtual currencies and central banks' monetary policy: future challenges”.
The report, drawn up by Marek Dabrowski and Lukasz Janikowski, was issued at the request of the European Parliament's Committee on Economic and Monetary Affairs. The conclusions it reaches constitute a focal point for the Commission's Monetary Dialogues, which will be held in July 2018.
Referring to cryptocurrencies as virtual currencies (VCs), the report explains the functionality of cryptocurrencies as a monetary instrument. It mentions its most popular iterations such as Bitcoin (BTC), Ethereum (ETH) and other popular altcoins. Also its ramifications for governments and their central banks.
If They Make A Positive Impact: They Should Not Be Banned
Describing cryptocurrencies as a novel but potentially disruptive technology, the report ultimately concluded that:
“[policy] makers and regulators should not ignore VCs, nor should they attempt to ban them … VCs should be treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks.”
The report reflects in its findings the limitations that the cryptocurrencies and the blockchain technology of the moment currently pose. Turning its analysis to the question of the possibilities for the instrument to replace current central bank practices, the report succinctly concludes that “the answer seems most likely ‘no.’”
In summary, the European Union report has been presented as a comprehensive and balanced analysis of the potential economic impact of cryptocurrencies, which is expected to be even greater than that of institutions such as the Bank for International Settlements.
Speeches And Structures Of The Ecosystem
A document issued by the Bank for International Settlements, based in Switzerland, aroused the skepticism of leading industry voices, provided outdated research and findings that conveyed a superficial understanding of the industry outside of Bitcoin's impact.
Instead, the EU report advocates the strengths and weaknesses of cryptocurrencies and examines the asset class from a variety of angles.
In its introductory analysis, the report repeatedly emphasizes the idea that cryptocurrencies is used as a contemporary form of private money. And as such, as private money, they have no intrinsic value in the sense that they are not linked to any underlying commodity or sovereign currency, the report states. Although it admits that in this sense, they do not differ from most contemporary sovereign currencies.
The report continues to provide a simple and convincing breakdown of the economic and technological characteristics of cryptocurrencies. Providing brief descriptions of the three most popular assets in the market (BTC, ETH and XRP) and the acceptance of cryptocurrencies by traders and popular services.
Under the subheading “Potential economic advantages and disadvantages of VCs (risks and opportunities)”, the report is launched in a sub-section to weigh the pros and cons of cryptography.
The authors also highlight a number of meritorious advantages. They cite the typical war cry of crypto-enthusiasts: that assets allow for low-cost, transnational, fast and almost anonymous transactions. This is especially useful in developing or impoverished countries where citizens lack access to traditional financial instruments.
This last advantage can be spoiled by the learning curve on cryptocurrencies present to new users. Dabrowski and Janikowski also offer arguments against the promise of cryptocurrencies to deliver fast, low-cost transactions; questioning the long-term sustainability of a blockchain network and the potential for higher rates once mining rewards become a thing of the past.
Other disadvantages thrown up since his report discusses concerns about scalability, the ecological impact of mining, and the murky online practices that anonymity can facilitate.
Even in the concern that VCs facilitate money laundering, financing of illegal activities, tax evasion, circumvention of capital controls and fraudulent financial practices, they can also be considered legitimate actions in most cases.
Cryptocurrencies with a tendency towards the murky should not be generalized, since, in general, transactions in VCs are the result of the free choice of business of economic agents.
Further delving into the limitations of cryptography, the report continues to point to the inherent risks of investing in a largely unregulated speculative market. Citing the decline in market yields in 2018 and the vulnerability of centralized exchanges.
The report concludes the section with a brief summary of the cryptocurrencies regulatory policies of the United States, Switzerland and China.
Implementation To Global Scale Adaptation
In its second section, the report concludes that for all the reasons mentioned above, the VCs should be prepared to remain a stable component of the global monetary and financial architecture for several years to come.
The possibility of cryptocurrencies increasing the number of users and transactions cannot be excluded as venture capital will become a full substitute for sovereign currencies in the future. VCs have the potential to serve as full private money, regardless of their future share of the total volume of financial transactions and assets.
As such, Dabrowski and Janikowski warn that,
“economists who attempt to dismiss the justifications for and importance of VCs, considering them as the inventions of ‘quacks and cranks’ (Skidelsky, 2018), a new incarnation of monetary utopia or mania (Shiller, 2018), fraud, or simply as a convenient instrument for money laundering, are mistaken.”
As such, VCs respond to real market demand and attempts to regulate or prohibit the disappearance of cryptos are misguided and inconsequential. Policymakers should provide clear and cohesive regulations that treat cryptocurrencies as a formal and taxable asset worldwide.
Given the global and cross-border nature of cryptocurrencies and blockchain platforms, the new reports recommend harmonizing regulations across jurisdictions. Investment in venture capital should be taxed in a similar way to investment in other financial assets.
That said, the authors still argue that cryptocurrencies poses little threat to the status quo of the central bank figure. The third and final section of the report dedicates its word count to a brief history of central bank practices and how cryptomoney is covering the same historical terrain as other private money systems.
Salvation In Times Of Crisis
Except in cases of extreme political, social or economic turmoil, cryptocurrencies is likely never to replace government-issued bids. It is recognized that, in these extreme cases, VCs can replace a national currency that is faltering midst hyperinflation, as we have seen with the popularity of bitcoin against the bolivar in Venezuela in recent years.
Despite their technological advances and global reach, VCs are far from being able to challenge the dominant position of sovereign currencies and the monetary policies of central banks, especially in major currency areas.
The Report Reads As Follows:
“In extreme cases, such as during periods of hyperinflation, financial crisis, political turmoil, or war, they can become a means of currency substitution in individual economies.”
Even with these analyses, the report ends on an optimistic and balanced note, recognizing that the industry still has legs to travel and the possibility of future innovations to take it further. Checking his previous statements, he suggests that, with the right technological advances, the potential offered by cryptocurrencies should not be underestimated.
It cannot be ruled out that future developments in the field of information technology may provide even more transparent, secure and user-friendly variants of VCs. This could increase the possibilities for cryptocurrencies to compete effectively with sovereign, including major, currencies.