Debunking the ECB’s attacks on Bitcoin

European Central Bank (ECB) executives Ulrich Bindseil and Jürgen Schaaf, from the ECB Market Infrastructure and Payments Division, said in a blog post that Bitcoin is currently experiencing an “artificially induced last gasp before the road to irrelevance.”

The official representatives of the ECB took aim at Bitcoin following an 80 percent plunge in the asset’s value. The pair criticised its failure as a payment system and an investment, among other things.

Titled “Bitcoin’s Last Stand”, Bindseil and Schaaf, who are working on introducing a Central Bank Digital Currency in Europe, condemned Bitcoin for being rarely used for legal transactions. This despite it being created to improve the existing monetary and financial system.

The central bankers argued that Bitcoin’s design and “technological shortcomings” make it “questionable” as a payment method. “Real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions,” they wrote.

“It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation,” the ECB reps continued.

However, the bankers’ remarks about Bitcoin illicit activity were unsubstantiated and in contradiction to analytics data by auditing firm Chainalysis. In a June 2022 report, the firm concluded that only “0.15 percent of cryptocurrency transaction volume in 2021” was illegal, “despite the raw value of illicit transaction volume reaching its highest level ever.”

The statistic is fuelled by Bitcoin and Ethereum prices being higher than usual during the measurement period. If the Dollar or Euro increase in value, then the value of illicit transactions goes up independent of the number of financial crimes committed.

Chainalysis said the total transaction volume grew to $15.8 trillion in 2021, up 567 percent from 2020’s totals. The 0.15 percent recorded last year was the lowest ever. In 2019, the figure stood at 3.37 percent, while in 2020, it was 0.62 percent.

Criminals turn to fiat money for illicit activity? 

The picture for fiat money is significantly different. A United Nations report estimates that illicit fiat money activity ranges between ±2-5 percent of global GDP, or $800 billion to $2 trillion in US dollars. This figure is “consistent with the 2 percent-5 percent range previously established by the International Monetary Fund to estimate the scale of money-laundering.”

In other words, Euros, Dollars and fiat money are the currencies of choice for criminals in both absolute and relative terms. On the other hand, peer-to-peer transactions and self-custodial wallets can assist users in maintaining the same rights afforded to the public via physical cash transactions today. Unlike fiat money, most blockchains use transparent public ledgers, making it easier to track criminals down should the need arise.

Regulators often name ‘Zcash’ and other privacy coins as a focus for money laundering concerns. This is because zero-knowledge protocols shield customer information from other parties involved in a transaction. But to date, there is little evidence that malicious actors are exploiting this. At the same time, traditional financial institutions like JP Morgan and Deutsche bank get fined hundreds of millions of dollars per year for financial wrong-doing. In 2021, Deutsche bank paid a $120 million fine for funnelling $7 million to foreign officials, their relatives and associates in bribe payments or payments for unauthorised services.

The ECB lashes out against crypto

The central bankers said that Bitcoin and blockchain technologies in general have created “limited value for society.” They added that banks should be wary of promoting and investing in something that “should not be legitimised” to mitigate reputational risk.

The comments come off as thoughtless as many regulated Bitcoin financial products exist both within the European Union, the Americas and all over the world in the form of Exchange-Traded Funds (ETFs), Exchange Traded Products (ETPs), trusts and the like. In other words, Bitcoin and cryptocurrency assets are already legitimised in dozens of jurisdictions and trading blocs. Grayscale’s GBTC is the largest regulated Bitcoin product offering currently available in the United States. In Europe, Fidelity Asset Management launched its first investment product In February 2022. The British investment manager sought to tap into rising demand for exposure to the crypto space in a fully regulated and legitimate environment.

Finally, the authors also took a jab at Bitcoin’s proof-of-work consensus mechanism. They said that the largest cryptocurrency is “an unprecedented polluter” and that its “inefficiency” is “not a flaw but a feature” required to “guarantee the integrity of the completely decentralised system.”

Proof of work

Interestingly, the statement is partially correct as proof-of-work inefficiency is built into the system to maintain blockchain data integrity. With Bitcoin, coin issuance, transaction processing and security are bundled into the mining process which deliberately expends energy.

With regards to pollution, various studies about proof-of-work have shown that Bitcoin is neither a polluter nor does it require large swathes of energy presently. A quarterly report from the Bitcoin Mining Council found that as of the first quarter of 2022, the mining industry as a whole is using a sustainable electricity mix of 58.4 percent — one of the most sustainable industries on earth.

The report notes that sustainable energy usage increased 59 percent over 2021. More data regarding energy usage statistics for 2022 is needed to further observe this sustainable energy trend.

All in all, such aggressive comments from CBDC proponents are hardly surprising. After all, the ECB is one of the biggest critics of cryptocurrencies, having tried to ban proof-of-work mining earlier this year to no avail. This recent blog post takes the same abrasive approach, citing no data and juxtaposing fact-free criticism with popular talking-points without any real substance.

Is this the weapon of choice for certain ECB officials?

While there is a place for critiquing bitcoin and cryptocurrencies, this rhetoric is far-removed from reality, and highlights fundamental friction between Bitcoin and the ECB’s plans to roll out Central Bank Digital Currencies in the near future.