Bitcoin and ECB: how cryptocurrencies affect the global economy

May 23, 2019 · 4 min read
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Regulators around the world are trying to figure out what bitcoin is. But the European Central Bank is considering another problem: how the prime cryptocurrency affects monetary policy and the economy in general.

Since the blockchain is designed to transform the existing financial system and exclude intermediaries, this is going to affect the economy. While the cryptocurrency market is relatively small, comparing to the stock market, and runs at $240 billion. The capitalisation of the latter was more than $ 65 trillion in 2018.

However, slowly but surely financial giants like JPMorgan show how blockchain can be used effectively in the banking system. Anyway, it remains unclear what Bitcoin really is: money or commodities, what coin holders should be considered to be — investors or asset holders, and what kind of relationships do cryptocurrency and crypto exchanges users have?

Bitcoin — is it new money?

Although according to the innitial idea of the Bitcoin creator, Satoshi Nakomoto, BTC is a digital cash, it became clear that no one evaluates goods and services in crypto coins. Fiat money remains the measure of product value. They measure the value of BTC.

In its May report, the ECB published a number of properties of cryptocurrencies because of which they cannot perform the functions of fiat money. One of the main reasons is complete decentralisation, which in other words means, the absence of a central body that regulates and protects the value of coins.

Separately, the regulator noted volatility. According to analysts of the European Central Bank, sharp jumps in the price of cryptocurrency prevent their use as a means of payment and for the accumulation of value. Also, due to the volatility, cryptocurrencies cannot be used as a settlement unit between countries.

However, it is known that Bitcoin is often used for cross-border payments between counter parties from different countries. For example, in international trade or for compensation of remote employees. According to the company Bitwage, which deals with cryptocurrency salary projects, more than $ 300 billion went through them in 2019 only. At the same time, remote employees of Facebook, Google, Augur, Uber, Airbnb and other large international companies receive salaries in crypto. This practice takes place thanks to the high speed and low cost of such transfers.

Doctor of Economic Sciences Georgy Sigua believes that in order for Bitcoin to be used as a currency of international trade between countries, it is necessary that the IMF add it to the SDR (special drawing rights) along with the dollar and yen. However, the organisation still does not see any need in this move.

“If tomorrow world governments say that oil and gas can only be bought for Bitcoin, then it will be almost like a dollar,” the economist said.

How bitcoin affects the economy

As a result, the ECB came to the conclusion that at the moment cryptocurrencies do not particularly affect the monetary policy or other factors in the real economy. However, this may change if cryptocurrency replaces money or deposits. It should be true when talking about stable coins. They, however, still require further observation.

Meanwhile, the regulator stressed that cryptocurrency has not yet received mass acceptance, and only few businesses are ready to accept them for payment. In fact, even despite its volatility, for example, Microsoft accepts BTC as payment for Xbox content as well as in its Windows store.

According to the head of US Global Investors, Frank Holmes, cryptocurrencies are already becoming an alternative asset class and could become new gold.

He is confident that despite the “crypto winter”, the industry is actively developing and the number of Bitcoin users is only growing.

At the same time, according to Holmes, gold will continue to remain one of the most reliable options for investment. And people need to understand that it is for this reason that central banks keep their savings in gold. Indeed, if paper money is devalued, gold reserves will continue to be in value.

But, for now the likelihood that central banks will transfer their money to Bitcoin, tends to zero. Indeed, apart from high investment risks and the threat of the destruction of the central bank’s monopoly on printing money, cryptocurrencies do not represent anything for them.

Meanwhile, the head of the Galaxy Digital investment bank, Mike Novogratz, predicts Bitcoin new capitalisation records. He is confident that within 20 years the coin will overtake gold, the capitalisation of which is about $7 trillion.

At the same time, according to analysts at Binance Research, investing in BTC is more profitable than in oil and gold. Since the beginning of the year, the price of Bitcoin has grown by more than 50%. While oil — by 33%, technology stocks — by 18%, and gold within last five months sank by 1%.

In general, the cryptocurrency market is actively growing, there are new companies and new infrastructure projects. And the fact that the ECB is trying to assess the impact of Bitcoin and other digital currencies on the development of the economy is a positive signal. This once again proves that cryptocurrency is a multifaceted concept, and the relationships arising from their use can be interpreted differently, and no regulator has yet come to a common opinion on this issue.

Author: Annabella Lapshina

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