European Central Bank ECB President Christine Lagarde said some remarkable things about bitcoin during an interview with Reuters. According to her, bitcoin is a speculative asset responsible for 'funny business and objectionable money laundering' and requires global regulation. In the meantime, she praises the efforts to launch a digital euro. Yet there are also a few things that she forgot to mention.
Last Wednesday, Christine Lagarde, president of the European Central Bank, spoke in an interview with Reuters about bitcoin and digital currencies. She was asked if she was concerned about the bursting of the 'bitcoin bubble' and when she thinks regulation is needed.
She did not answer the question whether there is a bubble. She did call bitcoin a speculative asset. She refers to the recent price volatility, which makes it clear to her that bitcoin is not suitable as a currency. "For those who assumed it might turn into a currency, I'm very sorry, but this is an asset and a highly speculative one," she said.
Volatility
She may have some sort of point in that. After all, the bitcoin price is very volatile. Volatility means something like the price fluctuates up and down. This happens regularly with bitcoin and some people therefore conclude that it is unsuitable as a currency. Yet that way of thinking is not entirely true.
Every currency is subject to price fluctuations. The dollar index, an index that measures the value of the dollar against all other currencies, fell by about 10% in 2020. The euro index rose by about 10% over the same period. There are sometimes greater fluctuations in non-Western countries.
Yet few people will deny that the price of bitcoin has much stronger volatility than the euro or dollar exchange rate. However, this is not strange or bad, but logical and perhaps even beneficial.
The size of the market matters
Bitcoin is a fairly small market compared to other markets. Relatively little money is therefore needed to grow or shrink the market by a significant percentage, which is reflected in the price. If someone suddenly buys or sells € 100 billion in bitcoin, the price is likely to skyrocket or fall. The markets for euros and dollars, on the other hand, are so large that the price hardly moves, even when several billions are traded. This creates price stability.
If the bitcoin market were to grow to a similar size, bitcoin should, in theory, also have similar price stability. The value of a bitcoin will have to be very high, because there are only a maximum of 21 million bitcoins and together they will probably have to be worth thousands of billions of euros before the Bitcoin economy has the necessary economic mass.
Until then, bitcoin will likely remain volatile, but that's not necessarily a bad thing. After all, for many people, rising price, upward volatility, is what makes them interested in bitcoin. Traders see it as an opportunity to day trade. It is precisely the price rises and volatility that lead to new buyers, causing the market to grow, with the result that the price rises again. That attracts people again. Because some people are on a profit because of price increases, they can then decide to sell and that can cause the price to fall again. That is how volatility in the bitcoin price arises.
It is comparable to the volatility you sometimes see in the stock market, for example with penny stocks. When the market value is still low, the price shoots in all directions, but when the growth is out, the volatility is usually also considerably less.
Although this volatility is unfavorable for a means of payment, it does make bitcoin a very attractive speculative asset. Because, Lagarde may also have a point in this: at the moment bitcoin may behave more like an asset than a currency. However, this may be completely different in the future.
The evolution of money
Many Bitcoiners believe that money follows a kind of evolutionary path with multiple phases: it starts as a speculative collector item, after which it evolves in a second phase into a means of value storage. Once it has become a common and desirable means of value storage, the third phase follows, becoming widely accepted enough to act as a means of payment. After this phase follows the fourth and final development phase where it becomes a unit or account, a universal monetary unit of measurement. That's when people describe the prices of things in bitcoin instead of euros or dollars. It may have been about the same with gold; millennia ago that was perhaps just a 'worthless' glittering collector's item, the use of which was not seen.
Bitcoin is said to be in about its second phase right now, evolving from a collector's item to a means of value storage. There are still people today who approach bitcoin speculatively, as if it were a rare gadget that can increase in value, but there are also more and more wealthy parties who use bitcoin to store large amounts of value. If the adoption of bitcoin as a means of value storage continues to increase, the economic mass of the bitcoin economy will grow, which will eventually, in theory at least, create price stability.
Funny business and illegal money flows
In addition to being a highly speculative asset, Christine Lagarde said it is also responsible for all kinds of 'funny business and totally reprehensible money laundering'. According to Lagarde, there are judicial investigations that show this very clearly. However, she did not give concrete examples.
Perhaps this is because there are not so many concrete examples to be found. There are all kinds of studies that indicate that the use of cryptocurrency for illegal financial flows of money is relatively small.
For example, the Netherlands based International Center for Counter Terrorism states that "specific evidence of terrorist financing through virtual currency is rare." SWIFT, the international bank payment system, also states in a report that 'the number of identified cases of money laundering via cryptocurrency is relatively small compared to the volumes of cash laundered via traditional methods'.
According to the Financial Action Task Force, in 2009, an estimated € 485 billion and € 1,250 billion was laundered worldwide in 2009. Presumably, this has grown in tandem with the rest of the global economy in recent years. For the most part, this takes place through the traditional banking system, which involves gigantic sums and often involves banks playing a pivotal role.
Christine Lagarde nevertheless sees it through a different lens. According to her, regulation of bitcoin is absolutely necessary and must be regulated internationally. Because, says Lagarde: "If there is a way to escape, it will be used."
She praises the role of the Financial Action Task Force, which has been at the forefront of global regulation regarding Bitcoin in recent years. The FATF, for example, drew up international guidelines against money laundering and terrorist financing, which led to the introduction of the 'crypto law' and controversial additional 'KYCC' measures in the Netherlands last year.
Digital central bank money
What makes her enthusiastic are digital currencies issued by central banks, the so-called Central Bank Digital Currencies. The ECB is currently developing such a CBDC; a digital euro. Lagarde says in the interview that she recently completed a public consultation round about the digital euro and that no fewer than 8,000 responses were received.
"That's the highest number ever," she says proudly. However, what she does not say is what kind of reactions they were. Lagarde invited everyone via Twitter in November to give their opinion on a digital euro. That call has been widely shared within the Bitcoin community and presumably therefore a record number of official responses have been received by the ECB. These were probably not all positive responses.
After all, you only have to take a brief look at the responses to Lagarde's call on Twitter to get an impression of what people thought of it. A poll on Twitter from the IMF on what people think about digital currencies further highlights that: 80% responded that they believed digital currencies to be real money, but with regard to central bank digital money, only 35% said so.
2025
According to Lagarde, plans for a digital euro are already quite advanced, but she expects it to be ready around 2025. First, they want to make sure that the design is safe and precise enough and whether it meets the demands of Europeans. But because the developments in the FinTech world are moving very quickly, it is also possible that steps are taken earlier. China, for example, is already very far with their Chinese CBDC, she says. In the Netherlands, De Nederlandsche Bank is also investigating a digital euro.
Whether such a digital euro is really very different from the euros we have now is the question. A digital euro will probably not be decentralized, but strongly centralized around the ECB. In doing so, it ignores the innovations of Bitcoin and retains the problems of centralized money: money creation with inflation and monetary devaluation as a result, financial exclusion, censorship and the use of the money system as a political means of power.
Fundamentally different
Bitcoin, on the other hand, is decentralized. That makes it fundamentally different. Due to its decentralized nature, no one has the power or control, and no one can impose, censor, or take unfair advantage of another person's will. Everyone is equal on the Bitcoin network and everyone can participate. Unlike digital central bank money, with Bitcoin, nobody has the power to control monetary policy.
As a result, no one can create bitcoins anymore. This prevents unbridled inflation and guarantees scarcity: there will never be more than 21 million bitcoins. Bitcoin's entire design aims to keep it that way.
However, the ECB can create unlimited amounts of the euro, whether digital or not. They are also quite willing to do that. Christine Lagarde showed in November that there is just as much money available as deemed necessary. That is no problem, because: "The European Central Bank cannot go bankrupt or run out of money". After all, they can always just create even more money. You could almost call it 'funny business'. However, 'funny business' is of course the order of the day with euros. Christine Lagarde knows that all too well.
Listen to the whole interview on youtube below:
