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Is This the Swan Song for Bitcoin?

Categories : Cash generates security, Cash has legal tender status, Cash is a public good
December 15, 2022
Tags : Bitcoin, Cryptocurrency, Regulation
Two articles by leading economists announce the swan song for bitcoin. Both have triggered a spate of reactions. Here is what they have in common.
Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

In his November 17 New York Times op-ed, columnist and recipient of the 2008 Nobel Prize in Economics, Paul Krugman, states that “Recent events have made clear the need to regulate crypto, an industry that grew from nothing to a $3 trillion market capitalization a year ago, although most of that has now evaporated. But it also seems likely that the industry couldn’t survive regulation.”

In their November 30 blog on the European Central Bank (ECB) website, Ulrich Bindseil, director general of market infrastructure and payments, and Jürgen Schaaf, an advisor to the central bank, consider the current turmoil in the crypto markets “as an artificially induced last gasp before the road to irrelevance – and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD16,000.”

Crypto is not Money

For Krugman, “After 14 years, however, cryptocurrencies have made almost no inroads into the traditional role of money. They’re too awkward to use for ordinary transactions. Their values are too unstable.”

Bindseil and Schaaf confirm this: “Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions.”

Bitcoin has been Supported by Intensive Campaigning and Lobbying.

Krugman recalls that as the value of bitcoin was trading at record levels exceeding $60,000 on October 21, Singapore-based famously aired the “Fortune favours the brave” ad featuring Matt Damon, suggesting that investing in crypto is an act of courage comparable to those of mountain climbers or astronauts. As the crypto market crashed, the ad has been subject to worldwide ridicule, including featuring in the last South Park movie. This has not prevented from sponsoring the FIFA World Cup Qatar 2022.

The promotion has not been limited to movie and sports stars; Bindseil and Schaaf stress that “Large investors also fund lobbyists who push their case with lawmakers and regulators. The number of crypto lobbyists in the US has almost tripled from 115 in 2018 to 320 in 2021. Their names sometimes read like a who’s who of US regulators.”

In June 2022, a group of technology experts called on US lawmakers to block efforts to create a ‘regulatory safe haven’ for cryptocurrency. “The claims that the blockchain advocates make are not true,” Harvard professor Bruce Schneier, a member of the group behind the recent warning against crypto, told the Financial Times. “It’s not secure, it’s not decentralized. Any system where you forget your password and you lose your life savings is not a safe system.”

Regulation is Lagging Behind

For Krugman, “the crypto ecosystem has basically evolved into exactly what it was supposed to replace: a system of financial intermediaries whose ability to operate depends on their perceived trustworthiness.” However, legislation on crypto-assets has sometimes been slow to ratify in recent years – and implementation often lags.

Bindseil and Schaaf add that “the different jurisdictions are not proceeding at the same pace and with the same ambition. While the EU has agreed on a comprehensive regulatory package with the Markets in Crypto-Assets Regulation (MICA), Congress and the federal authorities in the US have not yet been able to agree on coherent rules.”

Krugman concludes that “if the government finally moves in to regulate crypto firms, which would, among other things, prevent them from promising impossible-to-deliver returns, it’s hard to see what advantage these firms would have over ordinary banks.” Bindseil and Schaaf concur “Since Bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised.”


This post is also available in: Spanish