The European Central Bank Has a Long History of Digital Currency Skepticism

European_Central_Bank_041107European_Central_Bank_041107According to European Central bank Governing Council member Erkki Liikanen, Bitcoin “isn’t subject to the most basic principles governing payment systems,” such as know-your customer, and this is “problematic.”

According to Liikanen, Bitcoin’s “continuity of operations and contingency planning are problematic,” and fluctuations in Bitcoin value “impose additional costs”

The Governing Council Member claims payment systems must meet five criteria, including technical efficiency, accessibility and non-discrimination, efficient cost-based pricing, operational stability with contingency plans in case of problems, and international compatibility.

Liikanen says no new virtual currencies meet these standards, stating “there’s again a risk that future payment systems will become fragmented with the emergence of new payment methods. It would be better to set the harmonized guidelines before this fragmentation actually happens.”

Liikanen, who also heads the Bank of Finland, made the comments at a speech in Helsinki. The Bank of Finland ruled in January 2014 that Bitcoin is a commodity, not a currency.

The statements come on the heels of a recent ECB report in which the central bank recognized the dramatic growth of virtual currencies. The report, titled “Virtual currency schemes – a further analysis,” is a 37-page report highlighting the risk of virtual currencies, while noting that bitcoin is used for approximately 69,000 transactions per day worldwide, concluding, for now, that Bitcoin is “economically insignificant.

Despite the “problematic” nature of Bitcoin, the ECB report ignores that, last year, the European Banking Authority published a report in which it stated that 24 European banks could not withstand another financial crisis.

Also in 2014, Yves Mersch, a member of the executive board of the  European Central Bank (ECB),  came down firmly on Bitcoin:

“Virtual money can, like cash, be used to buy real goods and services. It is “digital cash”. Bitcoin is the best-known example. This cross-border virtual payment system was launched privately in 2009 in response to the international financial crisis, offering money that was independent of central banks and commercial banks. Bitcoins are “mined” in a decentralised way in a computer network and managed in the same fashion. Their special feature is that payments are made directly between the participants without a bank as an intermediary. The elimination of any bank charges achieved in this way is often claimed to be an advantage.

However, exchange rate losses can quickly cancel out this advantage. For example, the Bitcoin exchange rate, determined by supply and demand, slumped from €170 to €70 in April 2013 after the Bitcoin exchange temporarily suspended trading and triggered panic selling. Further price falls occurred after hacker attacks, when Bitcoins were stolen on several occasions. This happened most recently in February 2014 and led to the winding-up of Mt. Gox. Since the Bitcoin trading platforms are not regulated, 100% losses are also possible. The absence of a clear legal framework also leads to considerable legal uncertainty among Bitcoin users. Although interested parties can very easily download the application for Bitcoin, they neither understand how this payment system works exactly, nor the risks they run when using it. Worldwide, there are probably a maximum of two million Bitcoin users, and only a few thousand businesses and service providers which accept bitcoins. For that reason, bitcoins have also been referred to as a “regional currency of the internet”.

Updated: June 17, 2015 at 7:41 am CET.

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