The ex-governor of the Luxembourg Central Bank, Yves Mersch, serves as a member of the executive board of the European Central Bank (ECB). In a recent interview with German newspaper Börsen-Zeitung, Mersch discussed the dramatic rise in the price of bitcoin.
Noting the "comparatively low" volume of bitcoin exchange, Mersch said, "Bitcoin trading is not at present an issue for monetary policy." He was quick to point out market exuberance, but soberly allowed that consumers are essentially free to do with their finances as they please:
"Regarding the increase in price, we are seeing speculative hype that might be a cause for concern. But of course individual investors are free to gamble. However, if something goes wrong, they should not come to us and say we should have outlawed it and protected them from themselves."
Mersch estimated the turnover of bitcoin at between 250 billion and 350 billion euros, but it's unclear what timeframe he was utilizing or how he arrived at that figure.
Regardless, given the divisibility of bitcoin and the prevalence of exchanges without fees (which might artificially inflate their volumes to attract customers), bitcoin's overall trading volume might not be the most reliable metric to examine. Distinguishing between legitimate market activities and trading bots is crucial to calculating the actual size of the market, and thereby determining potential effects on conventional markets.
Mersch also expressed concern about financial institutions, which are now dabbling in bitcoin. "There are now banks which hold positions in Bitcoin," he said. "It is a matter for the supervisors to judge how big the risks are."
As ETHNews reported in August 2017, Falcon Private Bank (headquartered in Zurich, Switzerland) announced plans to allow clients to purchase cryptocurrencies including Ether, Litecoin, and Bitcoin Cash. This occurred just one month after Falcon Bank added support for bitcoin.
But even the introduction of cryptocurrencies into banking systems seems somewhat limited. The scale of cryptocurrency holdings appears relatively small as compared to typical fiat holdings, and the probability of a bank default seems pretty low.
The real root of concern is in how bitcoin – and, perhaps, other cryptocurrencies – might interplay with the larger financial markets.
Mersch said that he is most concerned about "when financial market infrastructures such as stock exchanges enter this business. That poses a major threat to financial stability."
He's not the first person to realize the danger of mixing conventional finances with the untested cryptocurrency market. In November 2017, Interactive Brokers CEO Thomas Peterffy voiced very similar concerns about bitcoin futures.
"If these [bitcoin] transactions are kept separate from others [of the conventional variety], it's a secondary matter who wins and who loses," explained Mersch. "However, if all the participants in these financial centres are jointly liable, that can create difficulties, for instance, for banks or the whole system."
Indeed, it's critical to delve into how the members of a clearing organization might be held liable for gains or losses.
"And if the banking system gets into trouble," he added, "there will again be demands for support from the ECB. I would say from the outset: we shouldn't do this."
When asked if private cryptocurrencies could become a "real alternative" to central bank money, Mersch deflected.
"Money needs trust," he said. "Public currencies, for example the euro, have the backing of public institutions such as the ECB. Many of these [private] currencies have no backing, nothing."
However, Mersch smartly differentiated between bitcoin itself and bitcoin's "underlying technology, the blockchain."
"It's a somewhat different matter for the underlying technology, the blockchain. That's a challenge we all have to face, especially banks. Each institution has to know that in the future financial intermediation will no longer be heaven-sent, but has to be fought for."
Previously, Mersch implored banks to deliver instantaneous payment services for conventional fiat currency.