What does the ECB President’s view on Bitcoin mean?

According to Reuters, at a recent online conference, European Central Bank President Christine Lagarde expressed her views on bitcoin. This article provides some analysis of those views and some predictions for global financial regulators in terms of regulatory policy for bitcoin and cryptocurrencies.

Bitcoin is an asset

Lagarde considers Bitcoin to be a highly speculative asset, not a currency. Such a view likewise suggests that European financial regulation recognizes Bitcoin as an asset, but not an instrument that needs to be banned altogether, let alone called “rat poison squared” (Buffett, 2018). But it is highly speculative, and at the same time, it is being used for inexplicable businesses and as a tool for money laundering. Therefore, Bitcoin needs to be regulated.

Regulation of Bitcoin requires the cooperation of global financial institutions

Lagarde believes regulation of bitcoin requires multilateral cooperation from global financial institutions. If there is a regulatory flaw in global regulation, then Bitcoin will definitely take advantage of that flaw. So regulation of bitcoin must be a cooperative effort by global financial institutions. This cooperation could be implemented by starting with the G7, then moving to the G20 countries, and then pushing further. The FATF working group is currently playing a role in promoting this.

Lagarde is correct on this point. Bitcoin operates on a global scale, and any individual or institution can join and leave the network at will, and make bitcoin transfers with other addresses on the network. It is therefore not restricted by any national borders or regulations. Therefore, effective regulation of Bitcoin can only be accomplished through the cooperation of global regulators.

This view of Lagarde should also be the general consensus among global financial regulators.

At the G7 meeting in December 2020, G7 central banks and finance ministers have already expressed the need for stricter regulation of cryptographic digital currencies. More recently financial regulation in the UK has again suggested that crypto digital currencies are highly speculative assets. Research from some of the major financial institutions in the U.S. market similarly views bitcoin as a highly speculative product. For example, Wells Fargo’s research view is that Bitcoin is a highly speculative product. Bank of America’s research even suggests that Bitcoin is the mother of all bubbles.

The views of mainstream financial institutions and some financial regulators in this regard suggest that financial regulation will certainly take more steps to regulate bitcoin.

Global Regulation of Bitcoin is positive for Bitcoin

Bitcoin was originally designed to compete with the existing fiat currency system. Therefore its basic characteristic is that it is unregulated and any user can join, leave and use it at will.

Bitcoin has evolved to the point where its properties of value storage and value transfer are increasingly being applied. These applications occur both in some financially regulated regions where it is purchased by mainstream financial institutions and in other regions where it is used to avoid dollar sanctions in trade transactions between countries.

Because the use of bitcoin is not yet fully regulated, the vast majority of funds in the market are not accessible to enter this market. This is because these funds have to meet local regulatory requirements in order to operate.

So despite the popularity of Bitcoin and its rising market capitalization, a large portion of the funds managed by institutions in the market are still inaccessible. In addition, the current highly speculative nature of Bitcoin is also a major factor that prevents institutions from holding Bitcoin. For institutions that manage large amounts of money, they value stability over potential returns.

If Bitcoin were to be placed under financial regulation, its current highly speculative nature would certainly be curbed. This would be very favorable for institutionally-held funds to enter bitcoin. Therefore, global financial regulation is positive for bitcoin holders.

Global regulation of Bitcoin is also beneficial for crypto digital finance

If the world’s major financial regulators were to collaborate on regulatory policies for Bitcoin, the coverage of these policies would certainly not be limited to Bitcoin, but would be further expanded to cover the crypto-digital asset space. This is because the development of crypto-digital finance also has very strong international attributes.

The digital financial products developed on the blockchain to generate circulation are not restricted by national borders, and its liquidity must be cross-regulatory. Therefore, financial regulators around the world need to cooperate to develop common regulatory policies.

The stablecoin currently being developed in the market and the expected faster development in this area will further advance the development of crypto digital assets. This is because the development of stablecoins will definitely drive the development of the underlying blockchain, which will drive the construction of the financial market infrastructure. And on top of these new financial market infrastructures, various financial activities will definitely be carried out.

Such market infrastructures and the financial activities on them can be accomplished across national borders. So it will definitely require financial regulatory cooperation around the world to regulate such financial activities.

So I believe that as global financial regulation cooperates to develop a regulatory policy for Bitcoin, it will also develop a regulatory policy for the development of crypto-digital assets.

In fact, this activity has already started, and the FATF working group that Lagarde mentioned is operating as global financial regulator cooperation in this regard.

Clearly, the current growth of Bitcoin is driving global financial regulation to accelerate this cooperation.

Article from Gu Yanxi, Founder of Liyan Consulting

Translated by Yang(Mengyan Finance)