Cryptocurrencies will not replace the money printed and controlled by central banks, especially in major currency areas, or challenge the dominant position of official legal tender, according to the findings of the European Parliament’s Committee on Economic and Monetary Affairs (ECON) revealed in the latest report on virtual currencies.
The same position was aired earlier by the head of the European Central Bank Mario Draghi.
The report took the position that virtual currencies are little more than a modern form of private money, vulnerable to the same challenges and obstacles as their 18th and 19th-century incarnations. While they offer relatively fast and secure international transactions, and are used globally with disregard to national borders, they will hardly be able to gain market and official recognition due to the high risk of fraud, speculation, the lack of stability and limited use cases. In particular, the report outlines problems including:
Poor network externality. A given currency needs to be accepted widely by other economic agents, major trading platforms, and financial intermediaries. This creates a deep and liquid financial market for various instruments and fosters their adoption. Otherwise, it wouldn’t be able to perform one of the key functions of money, and its role will be reduced to an investment or speculative asset.
Information asymmetry. Basically, the creator of the asset always has an information advantage over other users, as they will never be able to gain full and timely access to all information about the product. This often leads to fraud and price manipulation. While the technical characteristics of some coins reduce this asymmetry, the risk of fraud remains.
Security. Cryptocurrencies exist exclusively in digital form, which means they can be lost in a split second due to a bug in the algorithm or successful hack attack. At the same time, their anonymous feature makes it hard to trace the bad actor and return the money to the legit owners.
State support. Governments and central banks are unlikely to accept them as official legal tender in any jurisdiction, which will limit their circulation and use and make them unlikely competitors to sovereign money.
Financial regulators are not totally happy to have virtual currencies around as their anonymity, coupled with the cross-border circulation, facilitates money laundering, the financing of illegal activities, tax avoidance, the circumvention of capital controls and other unwanted financial behavior and fraudulent practices.
While these concerns are not entirely groundless, the authors of the report warn against too much generalization as in most cases virtual currencies are used by businesses and economic agents for legal purposes, so they should be treated like any other financial transactions or instruments and their market share and associated risks taken into account.