A recent report published by the European Parliament advises policymakers and regulators not to ignore cryptocurrencies or attempt to ban them. It discusses how crypto should be treated, their taxation, as well as their potential impact on financial systems and central banks’ monopolies on money issuance.
Also read: Yahoo! Japan Confirms Entrance Into the Crypto Space
European Parliament’s In-Depth Analysis
The European Parliament last week published an in-depth analysis entitled “Virtual currencies and central banks monetary policy: challenges ahead.”
The 33-page document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee. It is co-authored by Marek Dabrowski and Lukasz Janikowski.
The report acknowledges that virtual currencies (VCs) “are often referred to as ‘cryptocurrencies’ because the majority of VCs rely extensively on use of cryptographic algorithms.” However, the authors of the paper wrote, “in our opinion, this term is misleading and may have a pejorative meaning, so we will not use it in our paper.” The document specifically defines VCs as private money that is usually decentralized, exists exclusively in digital form, most are based on blockchain technology, and most have global character meaning they work across national borders.
The report reads:
Policy makers and regulators should not ignore VCs, nor should they attempt to ban them. Both extreme approaches are incorrect.
The authors further asserted, “VCs should be treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks…Given their global, trans-border character, it is recommended to harmonize such regulations across jurisdictions.” In addition, they recommend that investment in cryptocurrencies be taxed similarly to investment in other financial assets.
Impact on Financial Systems
The report discusses the potential impact of cryptocurrencies on financial systems as well as whether they can break central banks’ monopolies on money issuance.
After analyzing the impact of cryptocurrencies on monetary policy, the authors concluded that it seems unlikely that cryptocurrency has the potential to compete with the sovereign currencies issued by central banks, “despite the relative market success of bitcoin and the chances for similar successes with its followers.”
Citing that the total market capitalization of all cryptocurrencies in April was below US$300 billion while broad money (M3) in the US approached US$14 trillion at the end of 2017, the report states:
The monetary dominance of major central banks and major currencies seems to remain unchallenged in the near future.
Walking a Thin Line
Nonetheless, the authors believe that “the prospects may look different in smaller monetary jurisdictions, especially in countries where the sovereign currency remains inconvertible or does not enjoy the trust of economic agents due to its poor record of stability or due to political and economic uncertainty.”
The report also finds that the demand for cryptocurrencies is not going away and that it should be taken seriously by all readers. “The economists who attempt to dismiss the justifications for and importance of VCs, considering them…frauds or simply as a convenient instrument for money laundering, are mistaken. VCs respond to real market demand and, most likely, will remain with us for a while.” It also concedes that:
In extreme cases, such as during periods of hyperinflation, financial crisis, political turmoil, or war, they can become a means of currency substitution in individual economies.
Meanwhile, the authors reiterated their opinion that cryptocurrencies pose little threat to the existing central banks. “Despite their technological advances and global reach,” cryptocurrencies are “far from being able to challenge the dominant position of sovereign currencies and the monetary policies of central banks, especially in major currency areas,” they conveyed. In the document’s summary they even hinted at a specific way to keep cryptocurrencies from becoming a more useful money:
As long as major trading platforms and financial intermediaries do not accept payments in VCs, their transactional role will remain limited and they will fulfil mainly the third function of money, the store of value —that is, they will serve as one of many investment assets.
What do you think of the European Parliament’s findings and recommendations? Let us know in the comments section below.
Images courtesy of Shutterstock and European Parliament.
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