The value of cryptocurrencies, especially bitcoin, has fallen over the last few weeks at the same pace that the number of warnings about digital currencies has increased.
The latest move came from the European Supervisory Authorities, the EU’s regulators for markets, banks and institutional investors.
The three bodies issued a statement on Monday in which they stressed that bitcoins and the like make no sense as investment products.
Even more, these “highly risky and unregulated products” could make you lose all your savings without having any protection.
The EU watchdogs’ warning shot came just days after Agustin Carstens, the general manager of the Bank for International Settlements, compared bitcoin with “a combination of a bubble, a Ponzi scheme and an environmental disaster”.
The rise and fall of bitcoin gave the central bankers’ umbrella organisation the cue to attack the virtual currencies and remind us of the dark side of “mining” these digital tokens.
These products are not only used by criminal organisations for money laundering. They are also ‘black holes’ on earth that are fuelling bubbles in places still recovering from past bursts.
The massive amount of energy needed to generate virtual currencies with computers, and the preferred location in cold places to limit overheating, has made Iceland the California of this digital gold.
More energy will be used on the island this year for ‘mining’ crypto currencies than by its 340,000 residents, many of whom lost their savings during the financial crisis.
Given that “in the longer run, potential risks in the field of financial stability may emerge” because of these digital coins, European countries led by France and Germany are calling for action at G20 level.
Elsewhere, authorities and regulators are not waiting to act. ECB President Mario Draghi and the vice-chair of European Parliament’s economic affairs committee Markus Ferber also expressed similar concerns.
“I expect the Commission to take the warnings by the three supervisory authorities seriously and issue a legislative proposal in this regard as soon as possible,” Ferber said referring to the ESAs communique.
But despite the avalanche of warnings and calls for action, the EU executive wants to put its hands first on other fields of digital-powered financial services.
The action plan on fintech that the Commission will publish in early March will focus on crowdfunding and peer-to-peer lending, two of the most popular services among citizens.
For entrepreneurs, one of the most promising proposals would be
an EU-level passport for startups operating in this field, so they can scale up and (build its?) reach in Europe, overcoming one of the main challenges for the newcomers.
Helping European firms reach enough size and compete at the global level is one of the Commission’s top priorities, as the institution admits the EU is losing ground in the global race.
As European Commission Vice President Valdis Dombrovskis warned, “despite our strong fintech players and potential, Europe is still lagging behind”.
That is why the Commission also threw its weight behind a group of institutions, firms and organisations to foster the development of blockchain.
These public ledgers are seen as as “a major breakthrough, as they bring about high levels of traceability and security in economic transactions online”.
For some, blockchain is a technology still looking for a need to address. But for many others, it would turn upside down almost every sector with intermediaries, substituting the middleman with a public ledger of blocks of information that register transactions.
Blockchain also happens to be the digital heart of the cryptocurrencies.
Bitcoin and blockchain are thus showing how difficult it is to strike the right balance with proper regulation, without killing innovation. But they also serve as an example of how the best technology – with wrong goals and reckless behaviours – may become the worst product.
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Views are the author’s