Last week, which admittedly was a slow financial markets news week, headlines in the cryptocurrency press announced that a new EU report told officials not to ban bitcoin. Blockchain News said the report “. . . blasts economists who criticize cryptocurrencies.” There was no blasting. While the report prepared by an EU policy department did provide some sound bites, it was one of five reports about central bank monetary policy toward virtual currencies that the EU Parliament had requested.
If the briefing papers do guide the discussions, there is no reason to expect shifts in today’s slowly evolving bank regulatory policy toward cryptocurrencies. The papers share a measured approach to analyzing current developments, identify several key issues and recommend prudent, non-specific measures to address them. The crypto community should be reassured that there appears to be no push to rush new policies into legislation, at least from the policy wonks.
To try to keep their policies aligned, Mario Draghi, the current president of the European Central Bank, and the European Parliament’s Economic and Monetary Affairs Committee, referred to as “ECON,” hold quarterly “Monetary Dialogues.” The July 9 regular meeting is to focus on cryptocurrencies and other virtual currencies like bitcoin, ethereum and monero. The ECON committee arranged for five briefing papers to inform its discussions with the ECB and published them last week. One of the papers was prepared by EU Parliament staff – the one that has the best sound bites – and the other four came from other Eurozone experts.
According to the briefing papers, there is very little current threat of payment system instability due to potentially wider use of virtual currencies. Nor do the currencies undermine the traditional monetary policy instruments available to central banks.
The papers seem to share the view that virtual currencies do not necessarily constitute a purposeful attempt to subvert the monetary systems as much as an evolutionary step in transaction technology. Like all non-governmental monies, virtual currencies face challenges in gaining private and public trust and market share. For the time being, virtual currencies are little used in commerce. In the EU’s staff report, Marek Dabrowski and Lukasz Janikowski note that in 2017 the worldwide daily average number of bitcoin transactions was about 275,000, while there were over nine million daily card transactions in Sweden alone.
The papers note that the common scaling problems in virtual currency transactions are being addressed and will likely be resolved.
One of the problems with using virtual currencies has been their value volatility. Experts from the Kiel Institute for the World Economy note that a natural result of the observed volatility is to require much higher levels of reserves or collateralization against bitcoin and other virtual currencies. This further impedes their usefulness for transactions.
Karl Whelan of University College Dublin also points out that even if a virtual currency were to supplant a fiat currency there would still need to be banks and, of course, bank regulation. Bank regulation would address issues of monetary liquidity and the safety and soundness of institutions, as it does today.
In “Cryptocurrencies and monetary policy,” the paper from the economics consultancy Bruegel, the authors question how fractional reserve banking could continue to exist if virtual currencies come to dominate. Fractional reserve banking is our current commercial banking system where banks accept short term deposits and make long term loans, holding some cash back as reserves. The authors suspect that institutions might be less willing to lend protocol-driven virtual currencies when there are no lenders of last resort as there are today with fiat currency central banking.
While none of the papers convey a sense of urgency about the effects of virtual currencies on monetary policy and institutions, they do take seriously the potential use of virtual currencies to thwart other regulation. In their paper, Roasa Lastra and Jason Allen note that regulatory responses to developments like dark web marketplaces, money laundering, tax evasion, etc. are lacking. But they also note that the fast moving developments in RegTech (regulatory technology) may soon enough provide reliable tools. Maybe new technologies can repair what they disrupt?
All of the papers are available on the EU Parliament Committees’ website at http://www.europarl.europa.eu/committees/en/econ/monetary-dialogue.html.