A recent analysis report published by the European Parliament advises policymakers and regulators against banning cryptocurrencies. It discusses how cryptocurrencies should be treated and their potential impact on existing financial systems.
The document entitled “Virtual currencies and central banks’ monetary policy: challenges ahead” co-authored by Lukasz Janikowski and Marek Dabrowski, was prepared at the request made by the Economic and Monetary Affairs Committee.
The report acknowledges that virtual currencies are referred to as ‘cryptocurrencies’ because most of them rely extensively on “cryptographic algorithms”. According to the authors, the term ‘cryptocurrency’ is quite misleading, and therefore, has not been used in the paper. The 33-page document defines virtual currencies as private money existing exclusively in digital form, more often than not ‘decentralized’, based on blockchain technology, and having a “global character”.
According to the report:
Policy makers and regulators should not ignore VCs, nor should they attempt to ban them. Both extreme approaches are incorrect.
Furthermore, the authors asserted that VCs should be taxed similarly to “investment in other financial assets”.
The report further discusses the impact of VCs on financial systems and central banks. After analyzing their potential impact on monetary policy, the report concluded that it is very unlikely VCs have the potential to compete against money issued by central banks, despite the success of bitcoin in recent times and chances of similar successes in the market with its followers. It added:
The monetary dominance of major central banks and major currencies seems to remain unchallenged in the near future.
However, the authors believe :
The prospects may 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 its poor record of stability or due to political and economic uncertainty.
The report also finds that the demand for cryptocurrencies is not likely to go away anytime soon. It concedes that:
In extreme cases, such as during periods of hyperinflation, financial crisis, political turmoil, or war, they can become a means of currency substitution in individual economies.
The authors reiterated that despite their technological advances, VCs pose little threat to monopolies of central banks in money issuance.
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