European Central Bank down plays Digital Currency Risks

by Mercator Advisory Group 0

In a new report that follows a 2012 analysis, the European Central Bank (ECB) reiterates that virtual currency, such as bitcoin, is a “digital representation of value” and not money as currency is traditionally defined. Furthermore, in the report the ECB made sure to outline its list of drawbacks when using digital currencies like the lack of transparency, clarity and continuity; high dependency on IT and on networks; anonymity of the actors involved; and high volatility.

Nonetheless the ECB believes that the concerns around using digital currencies are somewhat overblown and that digital currencies do not pose a material risk to the smooth operation of modern payment systems. In fact, the ECB believes there is room for digital currencies to support modern electronic payment systems. In the report, the ECB writes, “A new or improved VCS, if it overcame the current barriers to widespread use, might be more successful than the existing ones, specifically for payments within “virtual communities”/closed-loop environments (e.g. internet platforms) and for cross-border payments.”

In the conclusions, the ECB highlights that digital currencies could have a role to play in the electronic payments system but this could be a double edged swords as a major incident involving digital currencies like bitcoin and a subsequent loss of trust in them could undermine users’ confidence in electronic payment instruments could affect the industry more widely.

Though digital currency regulation has yet to be passed on a pan-European level, Europe has seen a number of individual markets take steps to either encourage activity with digital currencies or to prevent use of them. While the ECB’s report will unlikely push regulators in one direction or another, it highlights that industry interest in the digital currencies continues despite Bitcoin largely disappearing from the headlines.

Overview by Trsitan Hugo-Webb, Associate Director, Global Payments for Mercator Advisory Group
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