Central Banks Don’t Like Cryptocurrencies
The European Central Bank (ECB) is finally taking a stand against cryptocurrencies like “Bitcoin”, which it says should not be accepted as legal tender since it is not susceptible to monetary control. This condemnation comes as the European Commission proposed rules to govern digital currencies.
After the draft rules were distributed, ECB officials wrote up a legal opinion that they published on Tuesday. They make their opinions about Bitcoin-like currencies very clear. (Source: “ECB urges EU to curb virtual money on fear of losing control,” Reuters, October 18, 2016.)
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In the report, they presume that Bitcoin aficionados are correct in assuming that people will gravitate towards the digital currency. Once there is widespread adoption, however, the ECB envisions a problem related to its control over the monetary system.
For instance, if there is an external shock or financial crisis that causes the economy to operate below its potential, the central bank can increase the money supply as a stimulant. However, this expansion of credit could be impaired by the fact that many people are using Bitcoin.
There is only a fixed supply of Bitcoin, something its creators hold as a virtue. But central bankers obviously disagree, because they believe that expansionary policy can help cushion an economic downturn. That’s the entire rationale of monetary policy and central banks to begin with.
“The reliance of economic actors on virtual currency units, if substantially increased in the future, could in principle affect the central banks’ control over the supply of money,” the ECB said in the opinion for the European Parliament and Council. “Thus (EU legislative bodies) should not seek in this particular context to promote a wider use of virtual currencies.”
The ECB also expressed concerns about how Bitcoin is used by online economic actors. Since it is known for anonymity, it can be used for buying illegal goods and services.
“Such transactions would not be covered by any of the control measures provided for in the proposal and could provide a means of financing illegal activities.”
