The ECB firmly denounces crypto

In November of 2021, the value of bitcoin peaked at USD 69,000 before falling to USD 17,000 by June 2022. Since then, the value has fluctuated around USD 20,000, with the recent FTX scandal dragging bitcoin down well below USD 16,000, sending the crypto sector years behind. 

Bitcoin was initially created to overcome the perceived flaws of the existing monetary and financial system in 2008. The concept was published as a global decentralised digital currency that promised to democratise global transactions, rendering the process free of any unnecessary fees or central bank manipulation. 

By the end of 2020, companies began promoting Bitcoin heavily with some venture capital (VC) firms still investing heavily in crypto despite the ongoing "crypto winter". VC investments in the crypto and block chain industry totalled USD 17.9 billion as of mid-July.

FTX was a cryptocurrency exchange valued at $32 billion before recently collapsing and abruptly setting off industry-wide panic. The exchange was founded in 2019 and, at its peak in July 2021, was the third-largest cryptocurrency exchange with over one million users. The trading firm collapsed for many reasons including a lack of internal controls and unchecked spending, according to former employees. It has now filed for bankruptcy as many of its customers may lose all or part of the money they had committed. 

Sam Bankman-Fried, founder of FTX, is at the centre of the controversy for his questionable stewardship. Amid recent troubles in the crypto market following the collapse of FTX, the ECB Blog took a stand on Bitcoin, calling it ‘a speculative bubble’.

‘Bitcoin is also not suitable as an investment. 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… Speculative bubbles rely on new money flowing in,’ it further added. 

The ECB had harsh words to say in a post that featured on their blog dated 30th November 2022: ‘It’s also worth noting that the Bitcoin system is an unprecedented polluter… First, it consumes energy on the scale of entire economies. Bitcoin mining is estimated to consume electricity per year comparable to Austria. Second, it produces mountains of hardware waste… This inefficiency of the system is not a flaw but a feature.’

Apart from expressing disapproval for its environmental impact, the ECB also hinted at possible changes to legislation regarding crypto going forward: ‘…Since Bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised. Similarly, the financial industry should be wary of the long-term damage of promoting Bitcoin investments.’

While this poses abstract ethical implications, there might be something concrete to form in terms of drafting further IASs and IFRSs, which are the regulatory guidelines that Eurozone auditors operate by when conducting an audit of any company. The US might have a different and more liberal take on the matter as it operates with different and more rigid accounting standards known as GAAP and FASB, where little wiggle room is left for grey areas. 

Practically speaking, for regulatory purposes, while there may be no effort to actively block companies from being set up in this sector, the regularity obstacles going forward might be more of a hurdle which might discourage future crypto entrepreneurs from entering the market. 

To provide further context into the unlikelihood of further crypto exchanges being set-up, crypto enthusiasts warn of the redundancy of such exchanges as they add risk as well as economically cumbersome compliance requirements that the decentralised currency itself was created to avoid.  

While the likelihood of further exchanges being initiated has taken a fatal hit from the FTX spoof, this occurrence will surely serve as a lesson going forward, much like the Bernie Madoff scandal had in 2009. On a positive note, when this incident happened, privately managed funds did not cease to exist or become illegal, but rather, a more intelligent and rigid regulatory framework has been established since then to help weed out bad actors from the mix. 

Disclaimer: This article is brought to you by Shaun Frendo, Research Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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