Economists at the European Central Bank (ECB) claim that the limited use of Bitcoin (BTC) disqualifies it as a legitimate form of currency.
Zero value
On February 22, the ECB's Director General for Market Infrastructure and Payments, Ulrich Bindseil, together with the Bank's Market Infrastructure and Payments Advisor, Jürgen Schaaf, published a co-authored blog post entitled: “ETF approval for Bitcoin – the new look of the naked emperor.” .”
The two economists start by rebuking U.S. regulators for approving spot exchange-traded funds (ETFs) for Bitcoin in January.
“For the disciples, the formal approval is confirmation that Bitcoin investments are safe, and the previous rally is evidence of an unstoppable triumph.” We disagree with both claims and reiterate that the fair value of Bitcoin is still is zero,” write Bindseil and Schaaf.
They argue that transactions with Bitcoin are still cumbersome, slow and costly. Additionally, they claim that Bitcoin is still primarily used for payments in illegal activities, with minimal legitimate use outside of this area.
As a result, Bitcoin cannot fulfill its promise of becoming a global decentralized digital currency due to its vulnerability to fraud and manipulation, they said.
The authors referred to an earlier ECB blog post from November 2022 that debunked what they said were 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 continually increasing value.
The ECB also warned of the risks to society and the environment if another bubble were to emerge in Bitcoin, particularly if supported by lawmakers who could inadvertently encourage growth rather than enforcing necessary regulations.
The blog post attracted a lot of attention in the crypto industry on social media.
The ECB is not the only financial authority to question Bitcoin's potential as a valuable digital currency.
Neel Kashkari, president of the Minneapolis Federal Reserve, recently expressed skepticism about Bitcoin's ability to serve as an effective hedge against inflation.
Kashkari has argued that Bitcoin is viewed as just another risky asset with no practical use in real-world economic scenarios. See below.
Pro-crypto enthusiasts and organizations regularly criticize skeptics and insist that the euro is losing purchasing power against cryptocurrency.
A recent report from Chainalysis claimed that 0.34% of cryptocurrency transaction volume in 2023 was related to criminal activity.
The data company then compared this to illegal transactions involving euros, which accounted for 1% of the EU's GDP, or €110 billion, in 2010.
Dwindling fortunes
The ECB recently announced its first annual loss in 20 years, amounting to 1.3 billion euros ($1.4 billion) for 2023. This loss is primarily due to increased interest expense on key liabilities, while interest income on assets fell due to fixed interest rates or long maturities.
Despite the loss, the ECB pointed to significant capital and revaluation accounts totaling 46 billion euros by the end of 2023. The central bank also expects further losses in the coming years, but assured that these losses will not affect its ability to conduct effective monetary policy would, with a return to sustained profits expected thereafter.
In response to rising inflation triggered by the COVID-19 pandemic and disruption to Russia's energy access following the invasion of Ukraine, the central bank adjusted interest rates from negative territory to a record 4 between July 2022 and September 2023 % at.
The ECB reiterated its ability to operate effectively despite losses and fulfill its mandate to maintain price stability. It wants to offset this loss with future profits and has decided not to distribute any profits to the national central banks of the euro zone for 2023.
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