German financial regulators say they have no plans to introduce a European Central Bank (ECB)-backed cryptocurrency in the near-term, citing their concern with a lack of understanding of digital currency market mechanisms, and associated risks and costs.
Kristian Rouz – German central bank officials say the introduction of a euro-based cryptocurrency is unlikely in the foreseeable future due to the high amount of risk and volatility associated with digital currencies. This comes after two prominent US derivatives and futures trading platforms launched bitcoin securities, and the entailing shock to the cryptocurrency markets.
Deutsche Bundesbank board member Carl-Ludwig Thiele said the Eurozone will stick to the traditional payments and settlement methods, and warned of possible large-scale losses of investment capital associated with cryptocurrency trading.
“Digital central bank money analogous to cash is currently not in sight,” Thiele said.
The largest digital currency, Bitcoin, continued its decline after regaining ground Friday, dropping to roughly $13,900 per coin during the pre-Christmas weekend from above $20,000 a week ago. This as many experts believe central bank-based cryptocurrencies could be just around the corner due to the rising popularity and mainstream acceptance of Bitcoin.
READ MORE: Russia is Wise to Embrace Blockchain, Shouldn’t Restrict Bitcoin — Specialist
Over the past two weeks, the Chicago Board Options Exchange and Chicago Mercantile Exchange introduced bitcoin futures traded against the dollar. These securities are seen as conventionally-accepted due to their indirect backing by the Federal Reserve, and can be used for bank transactions.
These latest developments suggested the Eurozone – battling the risk of disinflation for the past eight years – could launch a cryptocurrency of its own, alleviating the negative effects of its common monetary policy, which does not equally benefit the diverse national economies across the block.
Additionally, the Japanese government embraced Bitcoin this year by legalizing it as a medium for payment and settlements. China is about to introduce official central bank regulations for bitcoin, while a surge in cryptocurrency trading in South Korea provided a boost to its domestic investment.
German monetary authorities are, however, more skeptical due to their conservative approach to policy.
“We are seeing a rapid increase in value, which brings the risk of rapid losses,” Bundesbank Governor Thiele said.
An official cryptocurrency could benefit the Eurozone by allowing higher borrowing costs in prosperous national economies of the Northern Europe, and keeping them low where inflation is key to growth – places like Greece and Italy. Currently, the European Central Bank (ECB) conducts a uniform policy, to the dismay of both the North and South.
READ MORE: Indian Tax Authorities Probe 500K Bitcoin Traders for Alleged Tax Evasion
Germany argues for higher interest rates, while Italy advocates higher inflation – and the ECB has been unsuccessful at achieving either.
According to the Bank of International Settlements (BIS), it is too early to determine whether central banks would consider the issuance of their own cryptocurrencies as beneficial, as possible positive effects are unclear, the associated risks are not yet fully assessed, and blockchain technology – the fundamental basis for cryptocurrency – remains obscure and unproven.
“If their (investors’) losses affect others because they were financed with loans, then that would increase the risk of distortions on financial markets,” the chairman of Germany’s economic advisory board Christoph Schmidt said.
In other words, overleveraged investors might opt to allocate capital in bitcoin in hopes of obtaining a significant return-on-investment. They could then alleviate the debt pressure with the bitcoin-generated revenue.
However, rife volatility in bitcoin trading could wipe a significant volume of investment capital off the market, rendering some investors insolvent in the face of their existing obligations.
This as the Eurozone, and the German economy in particular, are significantly overleveraged as a consequence of the tepid economic recovery of the first part of the current decade.
However, German regulators say a central bank-backed cryptocurrency remains a possibility once its possible positive effects and risks are fully understood. Monetary authorities are closely watching the developments in digital currency markets, and are ‘staying on the ball,’ says Felix Hufeld, President of the German financial watchdog BaFin.
“We are all working on understanding the topic and building our know-how,” he said.
The Bundesbank is paying particular attention to such possible risks associated with a hypothetical fiat-based cryptocurrency as scaling, financial and cybersecurity, as well as costs.