In their paper ‘The Distributional Consequences of Bitcoin’ (2017), Ulrich Bindseil and Jürgen Schaaf from the European Central Bank describe the possible consequences of continuous appreciation of Bitcoin prices for society in terms of distributional effects and social risks. According to them, the increase in prices might be considered a success for Bitcoin investors, but would also increase social fragmentation and economic instability, with the effect that ‘early adopters will increase their wealth at the expense of those who do not hold Bitcoin assets, and those who are latecomers’, putting at risk social cohesion and democratic values. At this stage, regulators and policymakers should consider the consequences of the technology for society at large, perhaps legislate against the negative side-effects. Bitcoin continues to be used as a versatile technology, with the systems such as Lightning Network allowing it to be used not only as a payment network but also as an asset to invest in.
The paper’s release provoked a lively discussion among Bitcoin enthusiasts. ‘This highly critical study submitted by a massively influential institution is just one of many recent examples that I interpret as Bitcoin being seen more and more as an existential threat,’ Tuur Demeester, the founder of Adamant Research, a Bitcoin investment research company, wrote in the aftermath. Given the elevation of Bitcoin and cryptocurrencies to an issue debated even in the environs of the US presidential race, it’s worthwhile to consider its role as a multipurpose tool, and what it might mean coming up. There’s no denying that the ECB has a point. But portraying Bitcoin’s early adopters as an existential threat to democracy is to ignore some of its potential, and the act of faith that led to Bitcoin’s invention.
This exercise by the ECB not only mirrors some of the actual complexity surrounding Bitcoin’s integration into established financial systems — but it reflects a broader sense of disquiet felt by establishment entities towards these decentralised digital currencies. The fight over regulation reveals persistent tensions between the benefits of innovation and the need for governance to curb rising economic inequalities and to maintain a sound financial system.
Source: Forbes
