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Bitcoin ‘rarely’ used for legal transactions, on ‘road to irrelevance’, say European Central Bank officials

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European Central Bank officials alleged on Wednesday that bitcoin is “rarely used for legal transactions,” is fuelled by speculation and the recent erosion in its value indicates that it is on the “road to irrelevance,” in a series of stringent criticism (bereft of strong data points) of the cryptocurrency industry as they urged regulators to not lend legitimacy to digital tokens in the name of innovation.

The value of bitcoin recently finding stability at around $20,000 was “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 down below $16,000,” wrote Ulrich Bindseil and Jürgen Schaaf on ECB’s blog.

The central bankers argue that 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,” they wrote.

Bitcoin also “does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of bitcoin is therefore based purely on speculation,” they wrote.

Portions of the bankers’ arguments lack strong data points and appear fuelled by irrational and emotionally-driven bias. Naturally, it has drawn criticism from several tech-savvy enthusiasts.

In a series of tweets, investor and commentator Joel John pointed to a security auditing firm Chainalysis report that concludes that only 0.15% of crypto transactions were linked to criminal activities, compared to 5% for the traditional currency.

“I don’t mean to imply crypto has no funny actors. We had our share of scrupulous players and the regulators are a crucial part of the mix. But a little more effort into how the industry is covered can help us go far. Bias is easy, but it doesn’t deliver progress,” wrote John.

But this argument is flawed in the sense that as a technology becomes the norm, an increasing share of events will be linked to it.

We no longer say “internet linked accident” or “mobile app linked suicide” – as terrible as both events are.

— Joel John (@joel_john95) November 30, 2022

The central bank officialls also alleged that bitcoin has “repeatedly benefited from waves of new investors,” “manipulations by individual exchanges or stablecoin providers” but these tactics aren’t able to provide stabilizing factors.

The bankers say that crypto firms have funded lobbyists to sway lawmakers and regulators, but their efforts are not proving successful because even lobbying activities “need a sounding board to have an impact.”

“The current regulation of cryptocurrencies is partly shaped by misconceptions. The belief that space must be given to innovation at all costs stubbornly persists. Since bitcoin is based on a new technology – DLT / Blockchain – it would have a high transformation potential. Firstly, these technologies have so far created limited value for society – no matter how great the expectations for the future. Secondly, the use of a promising technology is not a sufficient condition for an added value of a product based on it,” they added.

Several central banks around the globe have expressed concerns about the adoption of cryptocurrency (and the proliferation of their trading) in recent quarters. Shaktikanta Das, the governor of Reserve Bank of India, said earlier this year that cryptocurrency has no underlying value and is not even tulip, referring to the Dutch tulip bulb market bubble from the 17th century. The South Asian nation will kickstart a pilot for retail digital currency on Thursday, with which it aims to, among other things, protect citizens from the volatility of private cryptocurrencies.

Bindseil and Schaaf cautioned the financial industry players — many of whom are high-profile backers of the crypto firms — to be “wary of the long-term” reputational damage “once bitcoin investors will have made further losses.”

Goldman Sachs, Morgan Stanley, HSBC, Wells Fargo, Citigroup, Bank of America, Deutsche Bank, UBS, Commonwealth Bank of Australia, Bangkok Bank, and Development Bank of Wales are among the banks that have backed one or more crypto firms, according to Web3 Signals.

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