Rise or fall, bitcoin brings “harm” to society, considers the ECB

Analysts from the European Central Bank (ECB) published an aversive document towards bitcoin on October 12, where they consider it a “harmful” financial asset for society. The document, called “The distributional consequences of Bitcoin,” says that even a positive scenario in the price of the crypto asset would imply “impoverishment of the rest of society,” and would endanger “cohesion, stability and democracy.”

He paper in questionwritten by authors Ulrich Bindseil and Jürgen Schaaf of the European Central Bank, “focuses on a type of redistribution that occurs in particular in a positive Bitcoin scenario of continuously rising prices for the foreseeable future.”

According to the authors, this paper demonstrates “that not a single bad timing in trading or storing Bitcoin are necessary actions for impoverishment in a positive Bitcoin scenario. By this they mean that bitcoin can cause systemic poverty in society, and not only to the holders or traders of the currency.

“Bubble” or sustained growth of bitcoin (BTC)

Generally, the behavior of bitcoin and its socioeconomic effects pose two possible scenarios, according to traditional economists. The first is that “the Bitcoin speculative bubble will burst”, leaving large losses for millions of investors in the world. Such a scenario would favor fiat money and traditional yield assets that compete with bitcoin.

The second scenario is one where, to paraphrase the authors, the bitcoin bubble does not burst and the price of bitcoin continues to rise significantly for the next few years, just as it has been doing. Although this scenario has been considered positive by many people, The authors consider that it is not at all, and that it would bring a high social cost.

To support the claim, they argue that bitcoin is problematic from a social perspective because the wealth of early adopters (first users) comes at the expense of the laggards, who see themselves as “impoverished.”

Millionaire Bitcoiners and consumer habits

According to the authors, this represents a redistribution problem because the first users of bitcoin radically modify their consumption habits, which impacts the economy by raising consumer prices. It would be the responsibility of the Central Bank to reduce the impact of these increases.

The central bank is perfectly capable of neutralizing the effects of a significant increase in the price of Bitcoin on inflation and avoiding economic volatility.

Ulrich Bindseil and Jürgen Schaaf, ECB analysts.

In short, the rise in the price of bitcoin (BTC) would not be better than another where bitcoin “bursts like a bubble.” The reason is that this creates social inequality due to the way in which the consumption habits of the “bitcoin millionaires” affect the economy.

In this aspect, the paper averse to bitcoin (BTC) only attempts to measure the effects of wealth on consumption in the population, but does not easily address or address important issues that justify the existence of the cryptoactive, such as the risks of centralized money issuance.

Likewise, the document does not address essential problems such as the right to free individual initiative, which seeks to achieve physical and economic well-being. The above is only possible with a medium like bitcoin, capable of reserving value over time due to its scarcity properties.

It also assumes that personal consumption habits are problems that must leave the private sphere, and that it is up to the State to solve them.

Criticism of Satoshi Nakamoto’s paper

According to Ulrich Bindseil and Jürgen Schaaf, Bitcoin is not an effective technology for what it was designed for: to be an electronic payment system; first because of its slowness; then, due to its volatility, which “prevents” it from being money.

Analysts believe that the problem that Satoshi Nakamoto believed he discovered, and that bitcoin solves, arose from a misunderstanding. This would be because, unlike what the creator of Bitcoin believed, the mediation of disputes by banking institutions is an “optional service”, and banks can avoid incurring them.

The above implies, for the commentators, that Bitcoin would have been born to solve a pseudo-problemsince “Nakamoto seems to misunderstand the modus operandi of electronic commerce by confusing it with a technical need. The problem of the reversibility of electronic transactions, then, would not be such.

Furthermore, Bitcoin would have been born, again according to the authors, as a technology that gives excessive importance to solving the problem of double spending. They lightly think that the problem of double spending “is solved without particular difficulties, and certainly with a much lower social cost than that implied by the solution offered by Bitcoin.”

Ulrich Bindseil and Jürgen Schaaf conclude:

«Overall, Nakamoto’s interpretation of retail payments was inaccurate. “It is therefore doubtful that his invention effectively addressed his perceived problems in e-commerce, and therefore it is also not surprising that bitcoin has never been used significantly in legal e-commerce.”

Ulrich Bindseil and Jürgen Schaaf, ECB analysts.

Bitcoin is not a traditional financial asset

In addition to criticizing Bitcoin as electronic money, they problematize its status as a financial asset. In this regard, they say that Bitcoin “lacks the characteristics of traditional financial assets.”

They then list the attributes it is supposedly not capable of: “it does not generate cash flow (like real estate), interest (like bonds), or dividends (like stocks), and it cannot be used productively (like raw materials).

At this point, the authors demonstrate a lack of knowledge of bitcoin and its incentive system: bitcoin, although it does not produce “dividends”, does reward the participation of users to secure the bitcoin network, the same as the shareholders of a company invest. time and money in it, benefiting. The recurring nature of rewards to miners is represented by commissions, distinct from block processing profits.

On the other hand, bitcoin does not need to generate cash flow because it is not properly an investment asset (its derivatives are), although it can function as such. Bitcoin is something closer to a store of value.

Finally, Bitcoin does have properties of commodity in this case of digital commodity, because it can be used productively, as reported by CriptoNoticias. It serves as a guarantee of exclusive possession, without custodians or intermediaries, over the property. It serves as a store-of-value guarantee technology that does not require trust in third parties.