- REUTERS/Ralph Orlowski
- ECB executive board member Yves Mersch says cryptocurrencies “are not money.”
- Mersch compared bitcoin to a Ponzi scheme.
- He warned regulators to be wary of the growing risk of contagion as financial institutions start to look at digital currencies.
- Despite being dismissive, Mersch suggested some long-term good could come from the technological innovations underpinning digital currency.
LONDON – One of the European Central Bank (ECB)’s most senior figures says that cryptocurrencies are not money and compared them to Ponzi schemes – but said some good may come from the technological advances that underpin them.
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 on Thursday: “Virtual currencies (VCs) are not money, nor will they be for the foreseeable future.”
Mersch said the slow speed and high cost of processing transactions over the bitcoin network, combined with its wild fluctuations in value, mean it does not fit the traditional definition of money.
“At these speeds, if you bought a bunch of tulips with Bitcoin they may well have wilted by the time the transaction was confirmed,” he said after pointing out that transactions can take up to an hour to clear.
Mersch said digital currencies are in fact “a classic Keynesian beauty contest, where investors buy what they perceive others view as the most attractive investment.
“Like in Mr Ponzi’s schemes, those investors hope for future price gains and believe they will find a greater fool to sell to before the inevitable crash. Under these conditions, VCs exhibit wild fluctuations in value, meaning that they cannot be trusted as a store of value.”
‘Growing risks of contagion’
Mersch said cryptocurrencies’ “ties to the real economy are still limited,” but he warned that the risk of contagion is growing as mainstream financial institutions become more and more interested in the assets.
“There are signs that greed has weakened their resolve and some have begun to form tentative linkages,” he said. “A number of derivative products pertaining to VCs have recently been launched.”
CME and CBOE both launched bitcoin futures contracts in December last year, capitalising on increased interest in bitcoin sparked by its then-rocketing price.
Mersch added: “There is rising activity in euro at VC exchanges and some jurisdictions are falling over each other to issue licences to largely unregulated platforms and exchanges in a misplaced competitive race.”
EU countries and areas such as Switzerland and Gibraltar have become hubs for cryptocurrency activity thanks to their permissive regulatory approach to the space, which both have been keen to advertise.
Mersch said: “Amid the growing risks of contagion and contamination of the existing financial system, regional regulatory solutions have to be explored while we await an outcome from G20 discussions. Indeed, we ultimately need global answers in the absence of a defined jurisdiction for VC issuance.”
‘There is no need to fix something that is not broken’
Mersch largely dismissed the idea of central banks issuing their own digital currencies, an idea that Sweden is aid to be pursuing.
“It is important to avoid being beguiled by the flashing lights of novelty and assuming that, just because a technology is new, it is also better,” he said.
“Overall, there is currently no convincing motivation for the Eurosystem to issue DBM [digital base money] to the general public. It is unnecessary at present and, when the likely negative impacts on the financial system are taken into account, such a move appears disproportionate to the aims put forward by its proponents. There is no need to fix something that is not broken.”
While Mersch was largely dismissive of cryptocurrencies in his speech, he struck a more positive tone about the technology at the close of his lecture.
“Despite the many defaulted railroad bonds, railways are a common mode of transport today. From London you can even take a train directly to many parts of Europe through the Channel Tunnel – whose now profitable operator filed for bankruptcy protection in 2006. Netscape and AltaVista were titans in the early days of the internet. Web browsers and search engines are still with us, but those names are no more. So it may well prove with VCs. The technology may in time become widespread and useful, but early versions of it may fade from view.”