A recent report by the Policy Department for Economic, Scientific and Quality of Life Policies, which was written for the European Union Parliament, argues that virtual currencies (VCs) are a permanent financial development and need to be taken seriously by lawmakers. The authors of the report write:
"Policy makers and regulators should not ignore VCs, nor should they attempt to ban them. Both extreme approaches are incorrect. VCs should be treated by regulators as any other financial instrument, proportionally to their market importance, complexity, and associated risks. Given their global, trans-border character, it is recommended to harmonise such regulations across jurisdictions. Investment in VCs should be taxed similarly to investment in other financial assets."
The analysis takes a "middle ground between the optimism and excitement of the techno-enthusiasts and advocates of private money and the scepticism or even hostility of those who see VCs as product [sic] of monetary mania or utopia and a convenient instrument for money laundering, fraud, and other illegal activities."
In other words, the authors believe virtual currency is here to stay, but is unlikely to replace sovereign currencies any time soon.
The authors of the report view virtual currencies as a new form of private money, a form of currency that proliferated during the 19th century, eventually fading out as nations established central banks. The authors of the paper don't believe this will be the fate of cryptocurrencies, however. They instead expect virtual currencies will continue to exist, side by side with sovereign fiat.
"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," they write.
Still, they believe that virtual currencies don't "have the potential to compete with the sovereign currencies issued by central banks." They expect sovereign currencies will retain their dominant role, at least for now, unless an unforeseen global crisis occurs. However, in smaller countries that are susceptible to currency substitution (meaning locals prefer a more stable foreign currency such as the dollar or the euro), virtual currencies may gain a more prominent role. Such currency substitution has already occurred in Venezuela, they report.
According to the paper, unless cryptocurrencies become a widely accepted payment method, they will not supplant national legal tender. Referring to this as a "chicken or egg dilemma," the authors argue that virtual currencies can only become widely accepted when they reach a high volume of transactions (which, of course, would require that they have already become widely accepted as a payment method). Until then, virtual currencies will primarily function not as a medium of exchange, but as a store of value.
"Their transactional role will remain limited and they will fulfil mainly the third function of money, the store of value – that is, they will serve as one of many investment assets," the authors write.
The conclusion seems counterintuitive – virtual currencies, which promise a future of immediate and borderless transactions, is actually impractical as a method of payment. However, though they lack any inherent value and are entirely intangible, they function well as investments.