Virtual currencies including cryptocurrencies such as bitcoin are unlikely to have an impact on monetary policy, according to a new report by the European Parliament.

Image: European Parliament, Strasbourg, Hemicycle, Wikipedia

The research paper, provided by Policy Department A at the request of the Economic and Monetary Affairs Committee, explores the development of virtual currencies and their potential implications on sovereign currencies and central banks.

The findings echo those of a previous report by the German federal government that noted that cryptocurrencies were not a threat to the country’s financial stability due to their relatively small market capitalization.

Virtual currencies, and in particular cryptocurrencies, have surged in popularity in recent years, rising in value and attracting a growing number of investors. In April 2018, there were more than 1,500 cryptocurrencies.

Among the key advantages of cryptocurrencies, the European Parliament cites lower costs, higher speed of transactions, increased anonymity, and greater financial inclusion. But despite their technological advances and global reach, virtual currencies are far from being able to challenge the dominant position of sovereign currencies and the monetary policies of central banks, especially in major currency areas, the report argues.

“After almost a decade since [Bitcoin’s] creation, and notwithstanding its acceptance by some digital platforms and strong market value, its role remains marginal,” it says. “In April 2018, the total market capitalization of all virtual currencies was below US$300 billion, while broad money in the US approached US$14 trillion at the end of 2017. Differences in the number of transactions is even more strikingly in favor of sovereign currencies.”

But while the monetary dominance of major central banks and currencies are likely to remain unchallenged in the near future, the prospects look different in smaller monetary jurisdictions, especially in countries where the sovereign currency remains inconvertible or does not enjoy the trust of economic agents due to poor record of stability or due to political and economic uncertainty.

Citing the example of Venezuela, the report says:

“Such countries already struggle with the phenomenon of currency substitution in the form of spontaneous dollarisation or euroisation. In these countries, virtual currencies may offer another avenue for currency substitution.”

Venezuela launched the petro cryptocurrency in February 2018 which it claims is backed by the country’s oil and mineral reserves. The petro is intended to supplement the country’s plummeting bolivar fuerte currency, purportedly as a means of circumventing US sanctions and accessing international financing.

Cryptocurrencies are not to be dismissed

All in all, cryptocurrencies should not be denied, nor underestimated, as they respond to real market demand and are likely to remain with us for a while, the report says. It advises policy makers and regulators to not ignore virtual currencies, nor ban them.

“Both extreme approaches are incorrect. Virtual currencies should be treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks,” it says. “Given their global, trans-border character, it is recommended to harmonies such regulations across jurisdictions.”

Cryptocurrencies have surged in value and popularity in recent years, attracting the attention of both investors and financial regulators.

So far, individuals countries have adopted different attitudes toward cryptocurrencies with China, for instance, explicitly banning initial coin offerings (ICOs), while others, such as Switzerland, trying to attract cryptocurrency scheme investors and operators.

Perceived as one of the friendliest jurisdictions towards cryptocurrencies and ICOs, Switzerland has hosted some of the world’s largest and most successful campaigns including HDAC (US$258 million), Tezos (US$238 million), Sirin Labs (US$157.9 million), and Bancor (US$156 million).

The city of Zug is often referred to as the Crypto Valley due to the large number of companies engaged in blockchain and cryptocurrency in the city. Johann Schneider-Ammann, economics minister even said in January that Switzerland wanted “to be the crypto nation.”

The Swiss Financial Market Supervisory Authority (FINMA) issued guidelines for ICOs earlier this year. Companies issuing cryptocurrencies are required to obtain a license from FINMA, which is closely monitoring the sector for possible fraud.

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