Briefing: what bitcoin means for Europe

One bitcoin would have cost you less than 10 cents in 2008: today you’d have to fork out €5,500.

Bitcoin does not exist as physical currency.

Despite its murky reputation, the online currency bitcoin has a lot of perks. Like gold, its value is unaffected by war or inflation, and your payment information is (supposedly) completely safe. Even central governments can’t stop you from moving it around.

But bitcoin – a popular currency for criminals – is volatile in other ways. Plus, the comparisons to gold only stretch so far: bitcoin doesn’t exist in the physical realm.

So what does it mean for Europe?

Bitcoin (briefly) explained.

The identity of bitcoin’s inventor is a mystery. Known only as Satoshi Nakamoto, this individual (or individuals) launched bitcoin in 2009, only to vanish in 2011, just as the currency was starting to gain attention.

Countless journalists have tried to uncover the identity of Nakamoto, and many individuals have either claimed to be, or been accused of being, the elusive figure.

Alas, the mystery remains unsolved.

There is no confusion about what Nakamoto left behind, however. Bitcoin is attractive for both investors and individuals because transactions do not require a middleman, and its value is universal. But how does it work?

Bitcoin runs on what’s called blockchain technology. This — according to Marketplace — is ‘a database of sorts that allows bitcoin to function without having an authority, like the bank, controlling it. Instead of an accountant tracking your transactions, there’s blockchain, keeping an Excel-like spreadsheet of all the admin.’ Essentially, the blockchain functions as a public ledger that requires its participants to keep track of the system.


The EU stance on bitcoin.

The EU has been slow to respond to cryptocurrencies. This is largely because such currencies were relatively obscure before 2014, and there was little need for legislation.

That said, Brussel  has taken an increasing interest in blockchain over the past 18 months.There’s even a sense of impatience. After a text was leaked ahead of the European Summit last month, the EU Observer reported that European leaders wanted to be on top of ‘emerging trends’ such as blockchain technology, and had asked the European Commission (EC) to ‘put forward a European approach to artificial intelligence by January 2018.’

One such approach was discussed earlier this year, when the European Parliament (EP) voted in favour of establishing a taskforce that would monitor cryptocurrencies. The EP issued a press release stating that the taskforce needed to ‘build up’ expertise in virtual currencies, and potentially propose legislation that would help regulate blockchain.

Notably, the EP said it was important not to take a ‘heavy-handed approach’ to cryptocurrencies, as there are ‘significant opportunities for the consumer and economic development.’ To date, the taskforce has not been assembled.

The EP also commissioned a white paper into blockchain technology in February this year. According to Bruegel, the central analysis was that regulation was needed because the traditional ‘middlemen’ (i.e. banks) were being replaced. These new middlemen required a different set of ‘regulation levers’ to ensure that ‘parties could uphold the law.’

In addition, the report raised four possible options to respond to blockchain challenges, including more transparency from governments and providing (or denying) legitimacy to those using blockchain. But these are only suggestions: ‘for the time being there is little effort to intervene at the European level.’

Surely then, the EU’s meandering response to bitcoin  shows a lack of concern. Bitcoin trading volume currently stands at $748 million per day, with other cryptocurrencies like Ethereum trading at $115 million.

Those might seem like high figures, but as financial journalist Felix Salmon points out, ‘those kind of figures aren’t even a rounding error. The foreign exchange markets see volume of $4 trillion per day.’

It seems that bitcoin has yet to develop into a serious threat to the EU banking sector and authority.

A threat to Europe? The Cyprus case.

However, the crisis in Cyprus in 2013 serves as an illuminating example of bitcoin’s potential power. When the Cypriot government invoked capital controls on people’s savings –  essentially preventing individuals from accessing and moving their money – it demonstrated that central authority still resorts to extreme measures to protect its banks.

Salmon noted at the time that uninsured account holders with either one of Cyprus’s two largest banks stood to lose most of their money, which was a ‘stark reminder of the dangers associated with depositing money in a bank.’

The Cyprus Popular Bank was forced to close in 2013.

The response from a lot of people was to invest in bitcoin, because the government had no way of either confiscating it or preventing people from transporting it out of the country.

With this in mind, the EC is keeping an eye on the trajectory of cryptocurrencies.One of the big challenges is not how fast and how far to regulate,’ said a recent EP press release, ‘but how to correctly monitor this fast evolving technology.’

Then there’s the recommendations agreed after the Global Conference on Countering Money Laundering and Digital Currencies, which range from increasing information pooling between countries to taking action against cryptocurrencies.

The conference concluded that blockchain currencies catered to individuals who wanted to evade the law through anonymous transactions, and as such ‘the existence of such companies should not continue to be tolerated.’

Six of the world’s major banks are teaming up to start issuing their own form of blockchain transactions as of next year.

But there is also a movement to encourage blockchain incorporation into existing systems. Both Mark Carney, the Governor of the Bank of England (BoE), and Christine Lagarde, the head of the International Monetary Fund (IMF), have urged the banking sector to embrace fintech, or financial technology.

Carney said cryptocurrencies were part of a ‘revolution in finance, and Lagarde warned against ‘dismissing virtual currencies,’ saying citizens may well soon prefer them.

The banking sector is listening. Six of the world’s major banks are teaming up to start issuing their own form of blockchain transactions as of next year.

Why bitcoin won’t overtake the Euro anytime soon.

Essentially, the collaboration between these six banks has an inherent stability and authority that unregulated cryptocurrencies do not have.

According to the FT, ‘at the heart of the issue (as always) is who dictates and enforces the rules of the system if and when things go wrong.’ Banks are subject to the authority of the state, but a currency with no affiliation to any nation carries inherent risks.

These became painfully apparent in November this year, when $280 million worth of Ethereum was lost after a user accidentally deleted the code needed to access digital wallets.

Such is the nature of today’s cryptocurrencies: many people use them because they mistrust the state (as in the case of Cyprus), but unwittingly place a huge amount of trust in third parties to look after their coins. The end result can be strikingly similar.

There are two more strong cases for why bitcoin does not pose an immediate threat to the EU. Firstly, the recent Segwit2x controversy proves that cryptocurrencies fall foul of the same ideological schisms as traditional currencies. Segwit2x is core piece of software that bitcoin runs on, and people are disagreeing over how to update it.

Those in favour of Segwit2x argue it will provide more space for transactions, those against say it is an attempt to centralise the currency. Although the argument has been resolved, with Segwit2x supporters promising to postpone their plan, it shows that blockchain currencies suffer from programming arguments that most people would have no knowledge about, undermining faith in them.

Secondly, and more importantly, bitcoin is a bubble. The majority of bitcoin’s investors are buying it simply to sell it later at a higher price. This is known as ‘Greater Fool Theory,’ where buyers have little interest in the commodity itself, and don’t care if it’s overvalued – they know that a bigger fool will buy it from them later on.

Indeed, the moment everyone tries to offload their bitcoins, its price will crash. Because every investor knows this is a possibility, says the Economist, ‘there is every incentive to sell first.’

For European banks and governments, bitcoin and other blockchain currencies are not an immediate threat. The private sector has responded by beginning to develop its own form of cryptocurrencies, and Brussels has concluded that bitcoin warrants investigation and observation, but not legislation.

The biggest threat to bitcoin is the currency itself: its value cannot rise indefinitely. The question is not if the crash will happen, but when.


Max Caskie