Cryptocurrencies ‘Unlikely’ to Eclipse Central Banks: EU Report

Cryptocurrencies Unlikely to Eclipse Central Banks

Cryptocurrencies remain unlikely to pose a challenge to sovereign currencies and central banks despite its potential, a report by the European Union has found. 

Citing its technological properties, “their global transaction networks are relatively safe, transparent, and fast. This gives them good prospects for further development,” according to the European Parliament’s Committee on Economic and Monetary Affairs said in its latest Monetary Dialogue Report. 

“However, they remain unlikely to challenge the dominant position of sovereign currencies and central banks, especially those in major currency areas. As with other innovations, virtual currencies pose a challenge to financial regulators, in particular because of their anonymity and trans-border character,” the analysis, conducted by Warsaw-based non-profit research institute Center for Social and Economic Research, said. 

The study recognized the positive changes that virtual currencies have made to financial transactions, saying these are “used globally, disregarding national borders” unlike its paper predecessors in the 18th and 19th century. The paper also claimed digital currencies, which respond to real market demand, will have the potential to become a “full-fledged private money” or even a permanent element to the global economy. 

“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,” the report said. 

Currently, the total value of all digital currencies in circulation hugely underweigh the value of major currencies being circulated in the market. 

Demand for bitcoins, the first cryptocurrency introduced in the world, started to grow rapidly in the beginning of last year, resulting in the exponential growth of its exchange rate to almost $20,000 and market capitalization of more than $300 billion. However, its bubble burst in December last year, causing a rapid depreciation (by 64.7 percent over less than two months).  

In April this year, however, bitcoin remained the most popular digital currency with nearly 17 million virtual coins in circulation and market cap of more than $140 billion. 

“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,” the report said. 

Given the situation, financial authorities are urged to treat virtual currencies “as any other financial transaction or instrument, —that is, proportionally to their market importance, complexity, and associated risks.” 

Noting its global and trans-border character, “it is recommended that regulations concerning VCs be

harmonised across jurisdictions (which is far from the case now). Investment in VCs should be taxed similarly to investment in other financial assets,” it added.  

In some instances, Venezuela is planning to issue its own digital currencies based on the blockchain technology. It was the first nation to release its sovereign virtual currency called “petro” that was widely interpreted as an attempt to avert the economic sanctions levied by the United States. President Donald Trump then signed an executive order barring any transactions related to any digital currency issued by or on the behalf of the Venezuelan government. 

“As we can see, attitudes towards VCs vary significantly from country to country and there is no clear trend in regulations,” it said.

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