- A paper from the European Central Bank claims Bitcoin has failed as a payments system and warns that wealth discrepancies between Bitcoin holders and non-holders could lead to social unrest as the cryptocurrency’s value continues to increase.
- The bank warned that Bitcoin could lead to large-scale, significant redistribution of wealth from late adopters to early adopters and called on governments to implement policies to limit Bitcoin’s price growth.
A paper published by the European Central Bank (ECB) on October 12 claims that the continued existence of Bitcoin poses a threat to the global economy and social stability. Its authors say that Bitcoin has failed as a global payments system and is now being used primarily as a store of value, allowing early adopters to accumulate a huge amount of wealth at the expense of non-holders and late-comers.
What sounds intuitively promising or at least not harmful is problematic: Since Bitcoin does not increase the productive potential of the economy, the consequences of the assumed continued increase in value are essentially redistributive, i.e. the wealth effects on consumption of early Bitcoin holders can only come at the expense of consumption of the rest of society.
‘The distributional consequences of Bitcoin’, ECB
The paper also encourages governments around the world to implement policies aimed at killing Bitcoin, or at least preventing it from continuing to increase in value, in an effort to prevent what it claims could be a large-scale and harmful redistribution of wealth.
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Do The Paper’s Claim Stack Up?
The paper, titled “The distributional consequences of Bitcoin”, makes a lot of alarming claims about the consequences of Bitcoin being allowed to continue to grow as it has for the past 15 years — but are these claims valid?
Firstly the authors claim that Bitcoin investors who bought early, or bought during a bear market, and then sell for profit later are exploiting the buyers of their Bitcoin, effectively stealing their wealth. They argue that even if the ‘bubble’ never bursts, latecomers to the Bitcoin party will be “impoverished”:
Even if Bitcoin prices increase steadily for good, the wealth effects on consumption of early holders (the often cited “Lambo”) go at the expense of consumption of the rest of the population (also investments can be negatively affected). This paper demonstrates that neither a poor timing of trades, nor holding Bitcoin at all, are necessary for impoverishment under a Bitcoin positive scenario.
‘The distributional consequences of Bitcoin’, ECB
The claim forms much of the basis of the authors’ argument that Bitcoin is a danger to global stability.
Even if the Latecomers cannot attribute their loss of purchasing power, they will feel a malaise and frustration, that will contribute further to an ever more split society.
‘The distributional consequences of Bitcoin’, ECB
However, the authors fail to mention that this is precisely how all financial markets work — investors always aim to buy low and sell high.
According to the authors, because investors can buy low and sell high, governments must aggressively regulate Bitcoin in order to prevent continued price increases that may trigger social tension between holders and non-holders. They make a kind of call-to-arms for non-holders, saying:
In any case, current non-holders should realize that they have compelling reasons to oppose Bitcoin and advocate for legislation against it, aiming to prevent Bitcoin prices from rising or to see Bitcoin disappear altogether.
‘The distributional consequences of Bitcoin’, ECB
The paper also posits that Bitcoin is a non-productive asset, and that its increasing value is based on nothing and contributes nothing back to the economy. This claim may have some substance.
But it could be argued that other assets widely considered safe and potentially good investments also fall into this category — for example, precious metals like gold, and speculative real estate. Should governments also prevent price increases in gold and speculative real estate because these assets allow people to accumulate wealth?
The authors go on to make the contradictory claim that Bitcoin as a payment system is essentially dead, while at the same time saying it’s the payment system of choice for criminals. The claim that Bitcoin is hugely popular among criminals has been discredited, with a May 2024 report from the US Treasury Department finding that fiat cash is far and away the most popular choice for criminals, owing to its limited traceability:
This risk assessment recognizes that most money laundering, terrorist financing, and proliferation financing by volume and value of transactions occurs in fiat currency or otherwise outside the digital asset ecosystem via more traditional methods.
Illicit Finance Risk Assessment of Non-Fungible Tokens, US Department of TreasurySome cryptocurrencies, such as privacy coins like Monero, have been linked to criminal activity — again because they’re difficult to trace — but Bitcoin itself is not particularly popular for this purpose.
Paper Doesn’t Mention Why Bitcoin Is Popular
Interestingly, the paper fails to discuss why Bitcoin is thriving — that is, investors are seeking a safe haven from the devaluation of fiat currencies. Because of its finite supply, Bitcoin doesn’t suffer from the high inflation of fiat currencies and therefore is very attractive to investors in the face of large-scale quantitative easing programs implemented by many governments, including the US and much of Europe, which have seen the buying power of their fiat currencies drop significantly.
Related: HBO Documentary Reveals Who’s Behind Bitcoin, Claims Peter Todd is Satoshi Nakamoto
The paper also ignores the fact that Bitcoin’s pseudonymous founder, Satoshi Nakamoto, always intended for the OG cryptocurrency to be used as a store of value, not just as a payments system. Indeed, the very first Bitcoin block — the Genesis block — contains a reference to this, quoting the front-page headline from The London Times on the day the block was created: “Chancellor on Brink of Second Bailout For Banks”.
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