Bitcoin: A Useless Speculative Bubble?
While Bitcoin is hitting all-time highs around the world, the European Central Bank (ECB) published a blog post, which caused a stir in the crypto community, heavily criticizing BTC in the context of the recent Bitcoin ETF approvals in the United States. It claims the BTC “failed to become a global decentralized digital currency, instead failing victim to fraud and manipulation”.
Here are the main points of the ECB management’s views summarised for you, accompanied by some responses from the point of view of the crypto community.
Bitcoin used for illegal activities
The ECB blog post notes that Bitcoin is the top choice for money laundering in the digital world and is used for all kinds of criminal activities. ECB cites Chainalysis 2023 report showing data that the share of illicit activities grew significantly in comparison to previous years. The critics, however, say that Bitcoin offers an unprecedented level of transparency, helping to identify the flow of illicit transactions, which is not the case for cash and gold transfers. Moreover, the same Chainalysis report that ECB cites, estimates that illicit activity in cryptocurrency still remains a small share of total transaction volume at less than 1%. At the same time, dirty money still flow via traditional banking system: for 2022, financial institutions were fined for almost USD 5bn.
Bitcoin does not have a fair value
The authors of the ECB blog think BTC is not suitable as an investment, as it does not generate any cash flow (unlike real estate) or dividends (stocks), cannot be used productively (commodities), and offers no social benefit (gold jewellery) or subjective appreciation based on outstanding abilities (works of art). The question of why BTC is valuable always comes up since its invention. Crypto enthusiasts will tell you its value comes from scarcity (the so-called “digital gold” argument), as the amount of Bitcoin to be mined is limited. It also opens a discussion of why other items have value (like gold, precious metals, etc.) and Bitcoin does not. Many would argue that Bitcoin is practically seen by more and more people as a valuable asset class, resembling gold due to scarcity, while also benefiting from high accessibility, security and usability. Also in some circles, Bitcoin owners and especially first adopters are viewed as near-gods, so it’s questionable to state that it does not have any social status benefits, while gold watches or diamonds do.
Bitcoin is not a successful case for payments
The blog’s statement that Bitcoin transactions are too slow and inefficient to become an effective medium of exchange is not new and has been discussed by the crypto community for a while. One of the solutions that is already implemented is the Lightning Network making transactions faster and thus BTC use more practical. In crypto community, they say comparing Bitcoin to Visa and Mastercard payments is like comparing apples with oranges. It would be more fair to compare Bitcoin transactions (10 min) with bank transfers (taking days), as international card schemes represent an additional layer. For Bitcoin such layer would be the Lightening Network, which takes seconds to execute.
Dire environmental impact of Proof-of-Work
ECB blog claims that BTC mining using the Proof-of-Work mechanism pollutes the environment on the same scale as entire countries. Indeed, the figures on Bitcoin energy consumption are impressive. However, still the argument needs nuance, considering that miners are increasingly using renewable sources, accelerating energy transition. Another argument that is often used by the crypto community is why single out Bitcoin mining, while other traditional and tech industries also have significant environmental implications.
Overall, the ECB blog uses quite a harsh language like ”it seems wrong that Bitcoin should not be subject to strong regulatory intervention, up to practically forbidding it”. It hints at the need for more regulation in the area of decentralized finance and explains that a practical possibility exists by targeting individuals within the Bitcoin governance structure. “Decentralised finance can be regulated as forcefully as the legislator considers necessary” – strongly state the blog’s authors. Watch this space as it feels like there is more to come!
ECB blog post can be found here: https://www.ecb.europa.eu/press/blog/date/2024/html/ecb.blog20240222~0929f86e23.en.html
Written by Iulianna Romanchyshyna
