EU Parliament report tells lawmakers not to ignore cryptocurrency

European Parliament Virtual Currency report

EU Parliament report tells lawmakers not to ignore cryptocurrency

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European Parliament virtual currency reportA new report by the European Parliament’s Economic and Monetary Affairs Committee urges lawmakers not to ban or ignore cryptocurrencies as they evolve and develop.

The policy paper says that virtual currencies do not pose a threat to sovereign currencies as their role in payments and transactions is limited to date.

Challenge for regulators

The authors acknowledge cryptocurrencies pose challenges for regulators.

“This gives them good prospects for further development. However, they remain unlikely to challenge the dominant position of sovereign currencies and central banks, especially those in major currency areas. As with other innovations, virtual currencies pose a challenge to financial regulators, in particular, because of their anonymity and trans-border character.”

Market share & trust issues

EU Parliament ChamberThe report says cryptocurrencies face a challenge in gaining market share and building public trust as well as government acceptance as a regulated form of payment.

“While governments and central banks will unlikely accept them as an official legal tender in individual jurisdictions, the question of market recognition remains open, and the rapid expansion of Bitcoin and other larger VC projects worldwide indicate that it may happen (to some degree). And unlike previous incarnations, issuers of contemporary private money are able to ensure a transparent global network for circulation, a credible algorithm for the creation of the VC, and a transaction mechanism that is relatively safe, fast, and inexpensive.”

Harmonize regulations and taxes

EU virtual currency reportThe authors also acknowledge that governments fear cryptocurrencies will facilitate money laundering, online crime, tax evasion and other financial crimes.

Surprisingly, the report also recommends coordinated regulation of cryptocurrencies and taxing them like other financial investments.

“In most cases, transactions in VCs result from the free business choices of economic agents and, therefore, should be treated by regulators as any other financial transaction or instrument—that is, proportionally to their market importance, complexity, and associated risks. Given their global, trans-border character, it is recommended that regulations concerning VCs be harmonized across jurisdictions (which is far from the case now). Investment in VCs should be taxed similarly to investment in other financial assets.”

Warnings about uninformed critics

Throughout the report, the authors caution EU lawmakers to carefully assess information, especially from unsubstantiated sources or uninformed critics.

“The economists who attempt to dismiss the justifications for and importance of VCs, considering them as the inventions of ‘quacks and cranks’ (Skidelsky, 2018), a new incarnation of monetary utopia or mania (Shiller, 2018), fraud, or simply as a convenient instrument for money laundering, are mistaken,” the authors write.

Theft, fraud and hacking of virtual currency accounts and wallets remain a risk despite the technology advantages though. “Foley et al. (2018) estimated that approximately one-quarter of bitcoin users and one-half of bitcoin transactions are associated with illegal activities,” the report says.

Future of cryptocurrency in the EUCritics say that cryptocurrencies have not gained traction as a payments vehicle nor do they yet serve as a stable store of value. The scalability for future higher volume of global payments is also questioned.

Others criticize the lack of regulatory oversight as risky and part of the reason why costs of processing are lower than traditional currencies.

The advantage of greater financial inclusion is not so apparent in the EU where cheap basic bank accounts are available and the technology barrier to virtual currency adoption remains high for most consumers.

Several positive views of cryptocurrencies

Throughout the report, some of the advantages of virtual currencies are highlighted including:

  • reduced transaction costs and fast processing
  • enhanced security through digital signatures and cryptographic hash functions
  • borderless transactions
  • and anonymity.

“We try to take a middle ground between the optimism and excitement of the techno-enthusiasts and advocates of private money and the skepticism or even hostility of those who see VCs as a product of monetary mania or utopia and a convenient instrument for money laundering, fraud, and other illegal activities. We believe that whether one likes them or not, VCs will remain a permanent element of global financial and monetary architecture for years to come.”

European Parliament virtual currencies reportThe report cautions lawmakers not to stifle the potential technology development  and recognize that regulations will constantly struggle to keep up with new innovations.

“Financial regulations always lag behind financial innovations (Dabrowski, 2017), while VCs are a new invention with great potential for further technological development. Therefore, financial supervisory or monetary authorities will not be able to regulate in advance all new potential variants of VCs which may appear.”

Finally, the report recommends governments keep an open mind to the potential for virtual currencies:

“One cannot rule out that future progress in the area of information technologies can bring even more transparent, safe, and easier to use variants of VCs. This might increase the chances for VCs to effectively compete with sovereign currencies, including the major ones.”

EU virtual currency optimism

European Parliament cryptocurrency policy analysisThe report paints a realistic and somewhat encouraging picture about the future for virtual currencies. You can read the entire “Virtual currencies and central banks monetary policy: challenges ahead” paper here.