ECB has no institutional view on Bitcoins
Last month, the European Parliament Committee on Economic and Monetary Affairs received Mario Draghi, the president of the European Central Bank (ECB). Crypto currencies were a very hot topic, following China’s announcement that it would prohibit initial coin offerings and exchanges of Bitcoins. It caused stress on the international markets (1).
At the same time, ECB Vice-President, Vítor Constâncio (2), has called crypto currencies an instrument of speculation and compared the sharp volatility in exchange rates to the Dutch tulip Mania (in 1637 prices of tulip reached extraordinarily high levels and then dramatically collapsed).
In addition, Mexico is introducing legislation to regulate FinTech firms (including those operating with crypto currencies) and here are similar initiatives in many other countries (3). These recent developments were all highlighted and debated by MEPs.
Draghi was invited to explain the ECB stance to mitigate the risk of crypto currencies. MEPs asked him if he was more on the Chinese side, in favor of prohibition, or on the Japanese side, in favour of regulation.
Draghi said that he didn’t think that a regulatory framework for crypto currency was currently needed. Then, he added that the ECB has no authority to either to prohibit or regulate Bitcoins and ICOs. However, he confessed that the question hasn’t yet been deliberated by the ECB Governing Council: “we certainly haven’t had a discussion about an institutional view” (4).
Draghi’s analysis of the material risks that Bitcoins pose to the economy is based on three criteria: size, users’ acceptance, and the impact of Bitcoins on the real economy. Examination of all three channels suggests that it’s really too soon to talk of a means of payment for the future and systemic financial stability risk.
MEPs were also concerned about the draft guidelines that the ECB presented last week on FinTech credit institutions. According to those guidelines FinTech credit institutions have to comply with higher capital requirements than normal credit institutions (5). This could be seen as a protection of the old banking sector and the incumbents.
MEPs fear that with these guidelines the ECB is putting the European FinTech scene at a disadvantage compared with the rest of the world. They claimed that it contradicts the principle of ‘same services, same risk, same rules’. But for Draghi, the judgment of the ECB guidelines is that the risks are not the same, at least under certain specific conditions.
The ECB and the national supervisory authorities of the participating countries (such as the Financial Services and Markets Authority in Belgium) are in collectively in charge of the Single Supervisory Mechanism (SSM) that ensures the safety, stability and soundness of the European banking system (6). Surprisingly Draghi concluded is statement by saying that ECB’s main worry now with innovations in all fields of finance, Bitcoins along with others, was the potential fragility with respect to cyber risks.
Earlier this year, Draghi also criticised the proposed initiative by Estonia project to launch a national cryptocurrency called estcoin, stating that : “no member state can introduce its own currency. The currency of the Eurozone is the euro”(7).
This indicate that ECB will not interfere with Bitcoins as long as it does not threaten financial stability or interfere with monetary policy. Also, it tells us that the ECB doesn’t recognize or acknowledge that Bitcoin could disintermediate or even make redundant systemic market actors any time soon. At the same time, a number of major central banks are actively exploring the initiation of sovereign digital currencies (8).
Innovations in the technology for payments has always impacted the demand for central bank money. We predict that a widespread use of independent digital currencies would trigger a contraction of central banks’ balance sheets. Although unlikely, this would certainly diminish the power and seignorage of monetary institutions as well as the stability financial institutions built on the ‘middle-man’ business model (9, 10).