“Bitcoin bubble
grows and grows”, the Financial Times has written a few days
ago about the virtual currency created in 2009 for a peer-to-peer
network. Should we care? In a recent research paper, the ECB has
examined precisely this question.
Definition and
Typology
A currency is called
virtual if it is created by and applicable within a virtual community
to exchange virtual or real goods and services and to serve as a unit
of account. Its characteristics are:
- It is virtual money.
- It is digital money.
- It is not regulated by official Government agencies but only created and controlled by its developers
- Traditional financial actors such as central banks are not involved.
Depending on their
interaction with the real world, the ECB differentiates 3 types of
virtual currencies:
Opportunities and
Threats
From a commercial
perspective, issuing virtual currency can first of all lock-in
customers by providing a financial incentive to keep on participating
in the virtual community. Second, as the developer controls the
creation of virtual currency, a virtual currency program enhances the
issuer’s business model flexibility and his strategic control over
the business. Finally, a virtually currency can simply generate
revenue.
Beyond, virtual
currencies can contribute to financial innovation and provide
additional payment alternatives to consumers.
On the other hand,
virtual currencies also cause risks such as
- lack of regulation and legal uncertainty;
- counterparty and fraud risk;
- alternative currency for drug dealing;
- money laundering instrument;
- price instability;
- instability of the financial system and, especially, payment systems;
- reputation risk for central banks;
- undermining consumer protection laws.In addition, a type 3 virtual currency system might be interpreted as a Ponzi scheme in a sense that you always need additional investors to reconvert your virtual currency to real currency.
Appreciation of
threats
In a nutshell, the ECB
currently estimates the dangers as not substantial, given the small
size of virtual currency schemes, compared to regulated currency
schemes:
“For the time being,
[virtual currency schemes] do not jeopardize financial stability,
given their limited connection to the real economy, the low volumes
traded and the lack of wide user acceptance. However, developments
should be carefully monitored as the situation could change
substantially in the future.”
To illustrate ECB's
position, the value of USD in circulation is currently more than
6,000 times the USD value of issued Bitcoins.
As a matter of fact, in
the ECB’s view, type 1 virtual currency schemes are irrelevant as
they are entirely disconnected from the real economy.
As regards type 2
schemes, they might have a negative impact if
- they substantially modify the quantity of money;
- they influence the velocity of money (how often a unit of currency is spent over a specific period of time) or the use of cash;
- they can perturb the measurement of monetary aggregates;
- there is an interaction between the virtual currency and the real economy.
Now, I feel comfortable
again. Let the bitcoin bubble burst...
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