ECB says Bitcoin is artificially propped up, shouldn’t be legitimised

The European Central Bank stated on Wednesday that Bitcoin is being artificially inflated and shouldn't be approved by authorities or financial institutions because it is more akin to gambling.

Various arguments have been made to support bitcoin and other cryptocurrencies as an alternate method of payment and a defense against the inflationary practices recently adopted by powerful central banks like the ECB.

However, a 75% decline over the previous year, which coincided with the emergence of inflation, as well as a number of scandals, including last month's collapse of the FTX exchange, have given detractors among central bankers and regulators ammo to fight back.

Bitcoin's value reached a high of around US$69,000 in November 2021 before dropping to about US$17,000 by mid-June 2022, where it is currently circling.

The ECB described the recent stabilization of bitcoin as "an artificially produced last gasp before the path to irrelevance" in a blog post that used unusually harsh language.

Ulrich Bindseil and Juergen Schaaf said that "big bitcoin investors have the strongest incentives to keep the frenzy alive." "At the end of 2020, a few small businesses started promoting bitcoin at their own expense. Some venture capital firms are still making significant investments.

They claimed that as of mid-July, venture capital investments in the cryptocurrency and blockchain industries had reached $17.9 billion, but they offered no proof of price manipulation.

Regulators from all across the world are developing regulations for the cryptocurrency industry, a complex ecosystem that includes financing activities that take place on the blockchain, the distributed ledger that powers stablecoins that are ostensibly backed by fiat money.

According to the ECB blog, regulations could be mistaken for acceptance.

Bitcoin should be recognized as neither in regulatory terms and should not be legitimized, according to Bindseil and Schaaf. "Bitcoin appears to be neither suitable as a payment system nor as a kind of investment," they stated.

Bindseil claimed in an email to Reuters that regulators will characterize cryptocurrencies as betting or gambling.

The blog's authors continued by saying that the engagement of banks, insurers, payment service providers, asset managers, and other financial institutions "suggests to small investors that investments in bitcoin are sound."

Despite any potential short-term gains, the blog's authors warned that the financial sector should be cautious of the long-term harm that could result from encouraging bitcoin investments.

Because it is the primary supervisor of banks in the euro zone and has influence over financial legislation in the EU, the ECB's statements are taken seriously.

The Market in Cryptoassets Regulation (MiCA), which is now being authorized by the EU, would likely need to be expanded in a subsequent version, which ECB President Christine Lagarde has dubbed "MiCA 2," she stated on Monday.

This was probably a reference to bitcoin, which is exempt from MiCA because it has no legal status in the EU and only trading platforms are covered by the regulations.