Bitcoin is being artificially propped up and should not be legitimised by regulators or financial companies as it heads for “irrelevance”, the European Central Bank said on Wednesday.

Bitcoin and other cryptocurrencies have been variously presented as an alternative form of money and a shield from the inflationary policies pursued by major central banks such as the ECB in recent years.

But a 75% fall over the past year, just as inflation reared its head, and a string of scandals including the collapse of the FTX exchange this month has given critics among central bankers and regulators ammunition to fight back.

The value of bitcoin peaked at nearly US$69 000 in November 2021 before falling to around $17 000 by mid-June 2022, where it is still hovering now.

In a blog post using unusually scathing language, the ECB said bitcoin’s recent stabilisation was “an artificially induced last gasp before the road to irrelevance”.

“Big bitcoin investors have the strongest incentives to keep the euphoria going,” authors Ulrich Bindseil and Juergen Schaff wrote. “At the end of 2020, isolated companies began to promote bitcoin at corporate expense. Some venture capital firms are also still investing heavily.”

They said VC investments in the crypto and blockchain industry totalled $17.9-billion as of mid-July but did not provide evidence of price manipulation.

Regulators all over the world are drafting rules for the crypto world, a complex ecosystem that ranges from stablecoins supposedly backed by conventional currencies to forms of lending that happen on the blockchain, or distributed ledger, that underpins those coins.

‘Should not be legitimised’

The ECB blog said regulation could be “misunderstood for approval”.

“Since bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised,” Bindseil and Schaff said.

They added the involvement of asset managers, payment service providers, insurers and banks with crypto “suggests to small investors that investments in bitcoin are sound”.

“The financial industry should be wary of the long-term damage of promoting bitcoin investments — despite short-term profits they could make,” the authors of the blog said.

The ECB’s words carry weight because it is the top supervisor of eurozone banks and has a say on the European Union’s financial regulation.

ECB president Christine Lagarde said on Monday that the EU’s Market in Crypto-assets Regulation (Mica), which is in the process of being approved, would likely need to be broadened out in a future iteration that she branded “Mica 2”.

This was a likely reference to bitcoin, which eludes Mica because it does not have any legal entity in the EU, meaning that only platforms for exchange are captured by the rules. — Francesco Canepa, (c) 2022 Reuters