The recent surge in Bitcoin prices is due to temporary and unsustainable influences such as price manipulation, demand for illicit activities, and misguided regulations, according to a new report by the European Central Bank (ECB). The bank claims that Bitcoin’s price movements might not be a true reflection of its underlying value because it lacks intrinsic value, has a proven history of fraudulent activity, and is potentially susceptible to trading malpractices and liquidity problems.
ECB also suggests that the recent rally in prices driven by the approval of the Bitcoin exchange-traded fund (ETF) could spell the beginning of the next boom-bust cycle. This could lead to extensive damages including environmental harm and a drastic redistribution of wealth at the detriment of the less sophisticated.
The ECB report posits that Bitcoin is a prime facilitator of illegal actions such as money laundering, ransomware attacks, and potentially terrorism. Despite compliance measures, mainstream exchanges still convert illicit collection of cryptocurrencies into cash. There is a significant concern that existing regulatory approaches, including EU’s MiCA and the US SEC’s ETFs, have not effectively addressed these issues, as well as the environmental impact of Bitcoin.
The bank further argues that misguided regulations could mislead the public about the safety provided and calls for a robust intervention, which could entail stricter regulations or even prohibition to deal with the perceived risks of Bitcoin.
However, attitudes towards Bitcoin among financial institutions have greatly evolved over the last decade. Some have embraced the changes, but others, like the ECB, have maintained skepticism. In 2014, ECB Executive Board Member, Isabel Schnabel, stated the bank was unlikely to acquire Bitcoin for its balance sheet. This sentiment has been echoed in 2022 by ECB officials Ulrich Bindseil and Jürgen Schaff, who ruled out Bitcoin because of its inefficiency, lack of real-world utility, and speculative nature.