Author: Gan Jia Ci
Based on the July Monetary Dialogue report that was published on 26 June, the European Parliament declared that cryptocurrencies do not pose as a threat against central banks’ sovereign currencies.
In the abstract, the European Parliament’s Committee on Economic and Monetary Affairs mentioned that while cryptocurrencies are “relatively safe, transparent, and fast” and have “good prospects for further development,” they are not likely to challenge the “dominant position of sovereign currencies and central banks, especially those in major currency areas”.
However, the report stated,
“As with other innovations, virtual currencies pose a challenge to financial regulators, in particular because of their anonymity and trans-border character.”
The analysis was conducted by the Center for Social and Economic Research (CASE), a non-profit research organisation based in Poland. The analysis first discovered the positive effects of cryptocurrencies on financial transactions. That said, they come with many dangers, including fraud. “VCs are used globally, disregarding national borders. However, as with any money or financial asset, investments in VCs are not without risk. VCs may be subject to fraud, the bankruptcy of the issuer or intermediary, or speculative bubbles and bursts, among others,” the report explained.
The report acknowledged the significance of cryptocurrencies, claiming that they respond to the real market demand and will be here to stay.
However, despite the relative market success of Bitcoin and potential for similar success of its disciples, it is “unlikely” that cryptocurrencies will threaten central banks and sovereign currencies.
“In April 2018, the total market capitalisation of all VCs was below US$ 300 billion (Subsection 2.3, Table 1), while broad money (M3) in the US approached US$ 14 trillion at the end of 2017.34 Differences in the number of transactions is even more strikingly in favour of sovereign currencies.”
That said, there exists certain exceptions, such as the case of Venezuela, a country where the sovereign currency is inconvertible with low stability. Since it already struggles with a situation of currency substitution in the form of spontaneous dollarisation or euroisation, cryptocurrencies can offer another currency substitution channel.