July 4th, 2018
A new report from the European Parliament has urged lawmakers not to ban or ignore virtual currencies (VC). The report, Virtual Currencies and Central Banks Monetary Policy: Challenges Ahead, issued by the Economic and Monetary Affairs Committee, suggests that digital currencies be “treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks.”
“Economists who attempt to dismiss respond to real market demand and, most likely, will remain with us for a while.
“Policy makers and regulators should not ignore , nor should they attempt to ban them. Both extreme approaches are incorrect.”
The report notes the increasing use of, and importance of, virtual currencies in smaller “monetary jurisdictions” or in nations where economic stability and trust are low. “Such countries already struggle with the phenomenon of currency substitution in the form of spontaneous dollarisation or euroisation. VCs may offer another avenue for currency substitution, as observed recently in Venezuela.”
The 33-page report speaks to many of the advantages of virtual currencies, as well as the challenges it brings. It also does a pretty good job of describing Bitcoin, Ethereum, and Ripple, and their respective advantages and disadvantages. It’s a bit of a heavy read, with a large focus on answering the question, “Can virtual currencies break central banks’ monopolies on money issuance?”
“The answer seems most likely “no”, despite the relative market success of Bitcoin and the chances for similar successes with its followers. After almost a decade since its creation, and notwithstanding its acceptance by some digital platforms and strong market value, its role remains marginal. In April 2018, the total market capitalisation of all VCs was below US$ 300 billion (Subsection 2.3, Table 1), while broad money (M3) in the US approached US$ 14 trillion at the end of 2017.34 Differences in the number of transactions is even more strikingly in favour of sovereign currencies.
The authors do acknowledge an increased role for virtual currencies in regions of instability. However, declaring that digital currencies will remain a non-factor in the future, based on bitcoin’s current market capitalization today, seems short-sighted. Digital currencies are still very early in terms of their capabilities and technological developments. The notion that they would be written off now reminds me of this quote on the automobile:
“That the automobile has practically reached the limit of its development is suggested by the fact that during the past year no improvements of a radical nature have been introduced.”
-Scientific American, 1909
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