The European Parliament’s Committee on Economic and Monetary Affairs received a Monetary Dialogue titled “Virtual Currencies and Central Banks Monetary Policy: Challenges ahead” recently. The EU Report was confident that cryptocurrencies are “unlikely to challenge the dominant position of sovereign currencies and central banks.”
Marek Dabrowski and Laksz Janikowski from the Center for Social and Economic Research, which is a not-for-profit research institute, conducted the research. The paper opted for an objective standpoint as it looked at the positive technological properties and the negative shortcomings of the emerging technology.
The EU Report noted that the cryptocurrencies’ “global transaction networks are relatively safe, transparent, and fast.” The emerging technology, however, remains a big challenge for Central banks because of “their anonymity and trans-border character.”
While it was evident that the Monetary Dialogue saw cryptocurrencies as an inferior form of private money, it did explore situations where it would be used as a substitute for sovereign currency. These conditions are often in countries experiencing extreme hyperinflation, political turmoil, war, or a financial crisis.
The paper’s summary, however, acknowledged that cryptocurrencies do “respond to real market demand.” Although cryptocurrencies are unlikely to challenge Central banks they “will remain a permanent element of global financial and monetary architecture for years to come.”
Existing Problems With Cryptocurrencies
While there are varying definitions concerning cryptocurrencies, The European Banking Authority’s (EBA) defines a cryptocurrency as a:
“Digital representation of value that is neither issued by a Central Bank or public authority nor necessarily attached to a fiat (conventional) currency, but is accepted by a natural or legal persons as a means of exchange and can be transferred, stored or traded electronically.”
The paper noted that cryptocurrencies do not have any intrinsic value and their value comes from the ability to transfer tokens quickly without the need for an intermediary. There is currently no legal way to force parties to accept cryptocurrencies as a medium of exchange as it is a system dependent entirely on trust.
Furthermore, whether a cryptocurrency should be termed a currency is also questionable. The Bank of Canada, the Bank of England and others have argued that cryptocurrencies do not satisfy the existing traditional definition of money in regards to today’s financial and economic systems.
Cryptocurrencies are a limited means of payment, store of value and unit of account. There are not very many merchants open to accepting cryptocurrencies, they are extremely volatile, and the number of transactions processed on a global scale is significantly smaller than the global currency supply.
Despite these criticisms, the EU Report commented that cryptocurrencies might one day “serve as full-fledged private money regardless of their future share in the overall volume of transactions and financial assets.”
Cryptocurrencies: A Currency Substitution in Failing Economies
The EU Report also mentioned that in economies experiencing political instability, significant macroeconomic problems, and great uncertainty, there are many incentives to adopt cryptocurrencies instead of the existing sovereign currency.
Cryptocurrencies have, therefore, become very popular in Iran, a country where its currency has lost one-third of its value since December 2017. According to Brookings, the U.S.’s withdrawal from the 2015 Iran nuclear deal and reinstatement of U.S. sanctions caused the value of the Rial to fall fairly quickly.
While Iran’s Central bank has banned cryptocurrency dealings to prevent money from moving out of the country, more than $2.5 billion has already left Iran in the form of cryptocurrencies.
