Cryptocurrencies Can Never Replace Fiat – Says EU report

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has come up with a report on cryptocurrency entitled “Virtual currencies and central bank’s monetary policy: challenges ahead”. The finding of reports shows that cryptocurrency will not replace fiat currency, even in the long term.

What does the report contain?

The report is a is a detailed work carried out by the authors Marek Dabrowski, and Lukasz Janikowski from Center for Social and Economic Research, which is a non-profit research institution in Warsaw. The report majorly covers topics which study the potential of virtual currencies on financials systems and whether virtual currencies can break monopolies of money issuances.

While covering the potential of Virtual Currencies (VC), the report states that Virtual currencies (VCs) are a contemporary form of private money. Thanks to their digital form and the use of Blockchain technology (in many, but not all, cases), the transaction networks of VCs are relatively safe, transparent, and fast. Unlike their 18th and 19th-century paper predecessors, VCs are used globally, disregarding national borders. However, as with any money or financial asset, investments in VCs are not without risk. VCs may be subject to fraud, the bankruptcy of the issuer or intermediary, or speculative bubbles and bursts, among others.  

According to the report, In April 2018, there were more than 1,500 VCs; however, only a few recorded meaningful market turnover and capitalization. Bitcoin, the first VC, created in 2009, was a leader among them. The VC business has seen a continuous development in terms of number of VCs, a number of transactions, and market capitalization. However, as long as major trading platforms and financial intermediaries do not accept payments in VCs, their transactional role will remain limited and they will fulfill mainly the third function of money, the store of value—that is, they will serve as one of many investment assets.

Also, read: Regulatory Confusion Leaves Crypto Industry with a Unclear Future in Israel

Will it hamper the monopolies of central banks?

The report does conclude that there will be limited circulation of VC’s in real life use case they face multiple challenges such as governmental recognition as a means of payment, building public trust concerning their stability, and achieving sufficient network externalities related to their use.  The authors believe that despite their technological advances and global reach, VCs are far from being able to challenge the dominant position of sovereign currencies and the monetary policies of central banks, especially in major currency areas. However, in extreme cases, such as during periods of hyperinflation, financial crisis, political turmoil, or war, they can become a means of currency substitution in individual economies.

The last part of the report concludes that Financial regulators may dislike VCs because of their anonymity or cross-border circulation. They tend to fear that VCs will facilitate money laundering, the financing of illegal activities, tax avoidance, the circumvention of capital controls (in countries where such controls are in place), and fraudulent financial practices. Such concerns may be legitimate in some instances but may not be generalized.

Similar to BIS report released earlier this month, this report too is pessimistic on cryptocurrencies having a future apart from a store of value. How much of it holds true only time will tell.

Will cryptocurrencies become mainstream or will always live under the shadow of Fiats? Do let us know your views on the same