The first time the ECB officially warned about the dangers of virtual currencies in general, and in particular, bitcoin – what was then a mostly unknown currency trading in the single digits (in USD terms) – was in November 2012 when in a report called “Virtual Currency Schemes” it warned that “in an extreme case, virtual currencies could have a substitution effect on central bank money if they become widely accepted. The increase in the use of virtual money might lead to a decrease in the use of “real” money, thereby also reducing the cash needed to conduct the transactions generated by nominal income. In this regard, a widespread substitution of central bank money by privately issued virtual currency could significantly reduce the size of central banks’ balance sheets, and thus also their ability to influence the short-term interest rates. Central banks would need to look at their existing tools to deal with this risk (for instance, trying to impose minimum reserve requirements on virtual currency schemes).”
Ironically, since then the ECB has moved significantly down the narrative of currency substitution, and in fact, following a recent push to eliminate paper currency (now that the €500 bill is no longer produced) the central bank has been urging for a shift away from real, paper money and into electronic variants.
However, overnight in a surprising reminder how the European central bank feels about bitcoin and other virtual money, the ECB urged EU lawmakers to tighten proposed new rules on digital currencies such as bitcoin, fearing they might one day weaken its own control over money supply in the euro zone.
In other words, first the ECB went after cash; now it is going after all virtual currencies like bitcoin.
According to Reuters, the European Commission’s draft rules, aimed at fighting terrorism, require currency exchange platforms to increase checks on the identities of people exchanging virtual currencies for real ones and report suspicious transactions.
In a legal opinion published on Tuesday, the ECB said EU institutions should not promote the use of digital currencies and should make clear they lack the legal status of currency or money.
“The reliance of economic actors on virtual currency units, if substantially increased in the future, could in principle affect the central banks’ control over the supply of money … although under current practice this risk is limited,” the ECB said in the opinion for the European Parliament and Council.
“Thus (EU legislative bodies) should not seek in this particular context to promote a wider use of virtual currencies.”
The ECB argues the Commission’s proposal does not go far enough as it does not cover the use of virtual money to buy goods and services. “Such transactions would not be covered by any of the control measures provided for in the proposal and could provide a means of financing illegal activities.”
In short, while the ECB would love to ban cash which is a major stumbling block to the bank’s NIRP strategy, its proposed alternative is not virtual currencies, despite various such suggestions most notably by the BOE, but merely retaining currency if entirely in electronic form, think only debit and credit card transactions, which in turn allow every single operation and transaction to be tracked (and taxed) by both the central bank and local governments with pinpoint accuracy.