Would the ECB President invest in bitcoin? What’s his impression of blockchain technology?
In a series of videos released on February 13, 2018, European Central Bank (ECB) president Mario Draghi answered questions submitted for the ECB’s third Youth Dialogue. Cryptocurrencies and blockchain were among the forum’s main topics.
Italo Mottini from Milan, Italy, asked whether Draghi would dabble in bitcoin.
The ECB’s leader was understandably cautious.
“Well, it’s not up to me to tell Italo what he should do, but frankly, I would think [about] it carefully,” said Draghi with a wry smile. “A euro today is a euro tomorrow. Its value is stable.” By comparison, “The value of bitcoin oscillates widely.”
The ECB president also noted a major difference between traditional currencies and stateless cryptocurrencies.
“The euro is backed by the European Central Bank. The dollar is backed by the Federal Reserve,” Draghi explained. “Currencies are backed by the central banks or their governments. Nobody backs bitcoin.”
Draghi’s answer raises additional questions about what it means for a central bank or a government to “back” a currency. The vast majority of modern currencies are not linked to a tangible commodity. In the United States, for example, in 1971, President Richard Nixon formally severed the tie between the dollar and gold. This meant that the Federal Reserve was no longer allowed to redeem dollars for gold (as of publication, this is still the case).
Today, the backing of a government means that businesses and individuals must accept a currency as legal tender. But to date, bitcoin has not received this distinction. While bitcoin is legally accepted as a form of payment in Japan, it is not legal tender. As of October 2017, Russia has refused to acknowledge bitcoin as legal tender, and by all indications, there is no country that recognizes bitcoin as such.
So, where does the ECB stand on bitcoin?
“Many [people] posted questions about whether the ECB is going to ban Bitcoins or it’s going to regulate Bitcoins,” Draghi said. “I have to say, it’s not the ECB’s responsibility to do that.”
Even if bitcoin falls outside of the ECB’s purview, the European Union itself is wise to cryptocurrency. Yesterday, the European Supervisory Authorities issued a consumer warning about virtual currencies.
Asked about blockchain technology – the innovation that underpins bitcoin – the ECB president expressed optimism.
“Blockchain technology is actually quite promising,” observed Draghi. “It [can] make certain processes a lot faster than they used to be.”
He went on to explain, “For example, if there is an invoice that needs to be settled, it can be done instantly and automatically when it’s received. So being a new promising technology, [blockchain] will probably support the economy and create many benefits.”
“We are very interested in this technology. But it’s still not secure for central banking, and therefore, we need to look through it and investigate it more,” Draghi said. For example, “Since the [blockchain] search process is not a simple one, we joined forces with [the] Bank of Japan,” he added, referencing the ECB’s partnership for Project Stella.
“We are hopeful, however, that [blockchain] will be very useful.”
The questions posed to Draghi were not particularly controversial or thought-provoking. It’s almost expected that an official of his stature will question the value of bitcoin while lauding the potential of blockchain technology.
Politicians, entrepreneurs, and the crypto-faithful really want answers to tougher questions.
For instance, who has the right to create money in the EU? Draghi previously stated that “no member state can introduce its own currency.” So, what about the digital token created for Estonia’s e-Residency program, Estcoin?
The interviewer also neglected to ask Draghi whether bitcoin poses any threat to financial stability, as has been suggested by ECB executive board member Yves Mersch.
It’s commendable that the ECB is engaged in public discourse about blockchain technology and cryptocurrency. Perhaps Draghi’s silence on these additional matters is evidence that financial authorities are still working everything out themselves.
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