'Crypto is Dying' Declares Extremely Nervous Central Bank for the 8th Time

With the continuous unveiling last week of new facts about how awful FTX was before, during and after its collapse, we missed the European Central Bank declaring the death of cryptocurrency. It joins a chorus of doomsayer voices, from Peter Schiff to Jim Kramer, that have been declaring the death of crypto for going on at least half a decade.

But this one is a bit bigger than those two old skeptics, coming as it does from one of the world’s largest central banks. They were specifically speaking of Bitcoin, but their specious argument may as well be about all crypto, in much the same manner wagon wheel makers once complained about Model Ts specifically.

Coindesk does a fine job deconstructing the ECB’s empty assertions:

It’s critical to level-set that the published article doesn’t represent an official position of the ECB. It’s just a blog post on the ECB’s official website. But because it’s on the ECB’s official website, it is flying under a banner of authority. As such, it is worth parsing through the main points brought up in the post.

The post starts with an unsubstantiated (which was never substantiated later) point that bitcoin’s current price action is “an artificially induced last gasp before the road to irrelevance.” But what can be asserted without evidence can also be dismissed without evidence. So, let’s dismiss this point.

The next section in the ECB post is titled: “Bitcoin is rarely used for legal transactions.” Unfortunately, the body of the section doesn’t prove this point specifically (a shame, really, because it isn’t true) and instead focuses on how bitcoin’s value is based solely on speculation because a) it has no cash flow (like real estate), dividends (like equities), productivity (like commodities) or social benefits (like gold) and b) VCs are propping it up with $17.9 billion of investment in blockchain and crypto.

On a), not all real estate generates cash flow, Google has never paid a dividend, people use bitcoin so it is productive and there are clear social benefits to bitcoin. On b), the idea that $17.9 billion of VC investment in blockchain and crypto is enough to sustain $300 billion of value to bitcoin is frankly absurd, but I’ll concede that point because VCs do have vaunted reputations, so their involvement might, in fact, be propping up some of bitcoin’s market value.

Point is, there’s more than just speculation giving bitcoin value, even if speculation is part of it.

The last two sections in the ECB post are about how regulation can be misunderstood as approval, complete with a tired jab about Bitcoin energy pollution, and how promoting bitcoin bears a reputational risk for banks.

On the former point about regulation, I agree. Regulation could be misunderstood as approval, and regulation has prompted “the conventional financial industry to make it easier for customers to access bitcoin.” And yes, maybe this ease has suggested to small investors that bitcoin is a sound investment even if some other investors don’t think so. But that’s exactly how markets work: Some people think something is worth buying and some people think something is worth selling. Just because you think something is worth selling doesn’t mean that it isn’t worth buying.

As for the authors noting that the “Bitcoin system is an unprecedented polluter,” I will point you to some of the many articles and reports about this in particular (here, here, here and here). But just for the sake of a semantic argument (which are bad arguments), the energy sector is really the only “unprecedented polluter” given it’s the biggest.

On the latter, banks have enough reputational risk on their own. Two examples:

1.    HSBC was fined $1.9 billion in 2012 for laundering money for drug cartels (by the way, HSBC still exists)

2.    Wells Fargo was fined $3 billion in 2020 for fraudulent sales practices including opening accounts for people without their knowledge (by the way, Wells Fargo still exists)

Sure, this doesn’t mean there might not be reputational risk for banks associated with promoting bitcoin, but surely there’s a reputational merit outweighing this risk if bitcoin works out and customers make money.

In summary, I think this blog post is just that: a short blog post that isn’t meant to represent anything definitive. I look forward to a more thoughtful, wholesome report on bitcoin’s march to irrelevance by the ECB in the future.