Controversy rules the very dynamic world of cryptocurrencies. “The Bubble is Finally Breaking Down”, “The Price of Bitcoin is Yo-Yoing”, “Bitcoin’s Volatility Is a Feature, Not a Bug”, “Are the Days of Bitcoin Over? “, “Bitcoin Is the Future”. These are only some of the most recent headlines in the media on the Bitcoin/ cryptocurrencies debate. One can easily tell from such back-and-forth stories that the industry has tremendous potential. And yet, navigating this landscape can only leave the market intrigued, to say the least.
Why the intrigue and controversy?
Bitcoin brings transparent information and freedom for payments. It has no intermediaries, no geographical borders, no payments limit. There is no control by a central authority or a single person. And customers love that transactions involve very low and sometimes no fees at all. Also, there are no public records of these transactions, which makes them irreversible. They are processed immediately, which means there is no waiting time for checks and credit card payments to go through the bank and be accepted. And, because there are no banks involved at all, payments are processed on the spot, which means merchants get their money as soon as the customer clicks “buy”.
The controversy dominating this topic stems from the fact that despite its popularity, this digital currency has earned criticism of having no intrinsic value, being subject to wild value fluctuations. Bitcoin’s anonymity can also be a powerful tool for financing crime and the lack of regulation has likely contributed to the current bubble by facilitating market manipulation.
Although blockchain and cryptocurrencies have disrupted many industries, market participants are waiting to see where, when and how regulations will shape this industry. And so far, regulatory attitudes and reactions worldwide have been in a state of flux.
Spotlight on Europe
With PSD2 and GDPR implementation this year, regulation is already the phrase du jour in this region. But when it comes to cryptocurrencies, over the past year Europe’s financial regulators have adopted a ‘wait-and-see’ approach, while Bitcoin’s price almost hit the USD 20,000 mark at the end of December (up from nearly USD 10,000 a month before).
In September 2017, Mario Draghi, president of the European Central Bank (ECB) made headlines when he stated that his institution has no power to prohibit or regulate cryptocurrencies. A few months later (as of 2018), European Commission (EC) and ECB representatives seem to have either taken contradictory stances on the matter or adopting a lack of nuance in their discourse. Here are some examples:
In early February, EC launched its Blockchain Observatory and Forum in Brussels. The aim of the initiative is to “highlight key developments of the blockchain technology, promote European actors and reinforce European engagement with multiple stakeholders involved in blockchain activities.” Europe is impressed with the blockchain potential and sees a lot of successful use cases for this technology. But, surprisingly enough, the press release announcing this development didn’t mention anything about cryptocurrencies or Bitcoin. And “it is important to remember that if there were no Bitcoin, there would be no blockchain”, as C. Giancarlo, Chairman of the US Commodity Futures Trading Commission stated during a recent US Senate hearing on cryptocurrencies.
On February 5, during a debate on the ECB annual report, Mario Draghi stated that banks have not been observed to have relevant holdings of Bitcoin: “Actually, the credit institutions established in the European Union are showing a limited appetite for digital currencies like Bitcoin, notwithstanding the high level of public interest. Right now, digital currencies are not subject to a specific supervisory approach. Work is under way in the Single Supervisory Mechanism to identify potential prudential risks that these digital assets could pose to supervised institutions.”
Two days later, ECB chief supervisor Daniele Nuoy said the central bank will keep an eye on cryptocurrencies, but the bank does not consider regulation of the cryptocurrency market a top priority, despite European governments` calls to push for Bitcoin regulation at a global level.
On February 8, Yves Mersch, a member of the executive board of the ECB, said in a lecture at the Official Monetary and Financial Institutions Forum in London: “Virtual currencies are not money, nor will they be for the foreseeable future. Even if virtual currencies are not money, central banks should still be aware of the potential risks they pose for price stability and financial stability.” Mersch added digital currencies are in fact “a classic Keynesian beauty contest, where investors buy what they perceive others view as the most attractive investment”. His remarks resemble those of Agustín Carstens, general manager of the Bank for International Settlements who describes Bitcoin as “a combination of a bubble, a Ponzi scheme and an environmental disaster”.
Further discussions on cryptocurrencies will continue during the upcoming G20 summit in March this year. Meanwhile, efforts to raise market awareness on the risks of virtual currencies have intensified. Interestingly enough, most recently, UK crypto companies have taken a stand and lined up for self-regulation in a bid to “improve industry standards and engage policymakers”. As FT.com reports, the members of the group will adhere to a code of conduct, which includes guidelines around due diligence checks, ensuring customer funds can be paid out in case of insolvency, greater pricing transparency and increased security.
While the industry keeps debating on ways to effectively regulate Bitcoin and cryptocurrencies without stifling innovation, one thing is for certain. The potential of cryptocurrencies and blockchain to disrupt the industry cannot be dismissed. Implementing regulation in this space is expected to dissolve uncertainty and ensure market trust. At the same time, the technology will continue to peak people`s interest and no matter the regulatory outcome, it is important to remember: after all, fiat currencies, cash, cryptocurrencies or any other form of money is just based on the trust that people place on it. With the amount of attention and investment cryptocurrencies have received so far, it is hard to believe that Bitcoin will not stand the test of time.