Bitcoin is on the "road to irrelevance" and the financial industry must be cognisant of the long-term reputational risk of promoting investments in the cryptocurrency, according to a blog post published by the European Central Bank.
Written by the ECB's Ulrich Bindseil, director general of market infrastructure and payments, and Jürgen Schaaf, advisor, market infrastructure and payments, the article argued that bitcoin was neither a payment system nor an investment, and its recently stabilised price was an "artificially induced last gasp".
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Bindseil and Schaaf pose several rebuttals to traditional talking points for proponents of bitcoin, focusing initially on its proposed use as a currency.
They argue that due to its "conceptual design and technical shortcomings", bitcoin has not been and is unlikely to be used in the future for widespread legal transactions.
"Real Bitcoin transactions are cumbersome, slow and expensive," they wrote. "Bitcoin has never been used to any significant extent for legal real-world transactions."
Purely speculation
They also argue it is not suitable as an investment, as bitcoin generates neither cash flow nor dividends, and cannot be used productively or to produce social benefits, meaning the value of the cryptoasset is "based purely on speculation".
As with speculative bubbles, bitcoin relies upon new money flowing into the space, meaning the largest bitcoin investors have "the strongest incentives to keep the euphoria going".
In recent months, regulators have taken note of the crypto world and attempted to pass legislation on it, however the conversations have been ripe for misinterpretation.
"Lobbying activities need a sound board to have an impact," Bindseil and Schaaf explained, meaning the discussions raised between lawmakers and regulators arguing about the merits of bitcoin have "sometimes facilitated the influx of funds" and given the impression that "cryptoassets are just another asset class".
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The entry to the space by financial institutions also runs the risk of suggesting to smaller investors that investments in bitcoin are "sound".
Despite this, the risks of cryptoassets are "undisputed among regulators", but legislation and implementation of regulation has often been slow.
Unprecedented polluter
The blog highlights bitcoin as an "unprecedented polluter", with the inefficiency a feature rather than a flaw of the system.
"Bitcoin mining is estimated to consume electricity per year comparable to Austria," the pair noted, adding that it also consumes a huge amount of hardware.
"One bitcoin transaction consumes hardware comparable to the hardware of two smartphones. The entire bitcoin system generates as much e-waste as the entire Netherlands."
Bindseil and Schaaf warn that the continued promotion of bitcoin investments risks "long-term damage" to the financial industry and firms should be wary of the negative impact on consumers and reputational damage, which could be "enormous".
