ECB says Bitcoin is artificially backed, should not be legitimized

FRANKFURT, Nov 30 (Reuters) – Bitcoin is being artificially propped up and should not be legitimized by regulators or financial firms as it is heading towards “irrelevance”, the European Central Bank said on Wednesday.

Bitcoin and other cryptocurrencies have been variously presented as an alternative form of money and a shield from the inflationary policies pursued by major central banks such as the ECB in recent years.

But a 75% drop in the past year, just as inflation picked up, and a series of scandals, including the collapse of the FTX exchange this month, have given critics among central bankers and regulators ammunition to fight back.

The value of bitcoin peaked at nearly $69,000 in November 2021 before falling to around $17,000 in mid-June 2022, where it is still hovering now.

In a blog post with unusually alarming language, the ECB said bitcoin’s recent stabilization was “an artificially induced last gasp before the road to irrelevance”.

“Large bitcoin investors have the strongest incentives to keep the euphoria going,” wrote authors Ulrich Bindseil and Juergen Schaaf. “At the end of 2020, isolated companies started promoting bitcoin at the expense of the company. Some venture capital firms are also still investing heavily.”

They said VC investments in the crypto and blockchain industry totaled $17.9 billion in mid-July, but did not provide evidence of price manipulation.

Regulators around the world are drafting rules for the crypto world, a complex ecosystem that ranges from stablecoins purportedly backed by conventional currencies to forms of lending that happen on the blockchain, or distributed ledger, that underpins those coins.

The ECB blog said regulation could be “mistaken for approval”.

“Since Bitcoin does not appear to be suitable as a payment system or as a form of investment, it should be treated as neither in regulatory terms and therefore should not be legitimized,” Bindseil and Schaaf said.

They added the involvement of asset managers, payment service providers, insurance companies and banks with crypto “suggests to small investors that investments in bitcoin make sense”.

“The financial industry should be wary of the long-term harm of promoting bitcoin investments — despite the short-term profits they may make,” the authors of the blog said.

The ECB’s words carry weight because it is the supreme supervisory authority for banks in the eurozone and has an opinion on the EU’s financial regulation.

ECB President Christine Lagarde said on Monday that the EU’s Market in Crypto-assets Regulation (MiCA), which is in the process of being approved, will likely need to be expanded in a future iteration that she labeled “MiCA 2”.

This was a likely reference to Bitcoin, which escapes MiCA because it has no legal entity in the EU, meaning only platforms for exchange are caught by the rules.

Reporting by Francesco Canepa, editing by Louise Heavens

Our standards: Thomson Reuters Trust Principles.