Publication - Virtual or virtueless? The evolution of money in the digital age - Lecture by Yves Mersch, Member of the Executive Board of the ECB, Official Monetary and Financial Institutions Forum, London, 8 February 2018
European folklore warns of the will-o’-the-wisp, a malignant creature that dwelt in marshes. It would appear as a light in the distance, which a traveller would mistake for houses. As they reached the place where they thought the light was, it would move further ahead, drawing them deeper into the marsh to their untimely death and a watery grave.
In some areas, will-o’-the-wisps were said to mark buried treasure. Investigation of the phenomenon found it was related to dissipating bubbles of marsh gas.[1]
With the draining of marshes to make way for agricultural land, will-o’-the-wisps are rarely sighted nowadays. But there remain plenty of distant flashing lights to distract travellers with promises of riches. As with the previous incarnation, these flashing lights often turn out to be just like bubbles of marsh gas – insubstantial and foul-smelling, but also flammable and sometimes able to burn things around them.
The most recent beguiling wisps are named variously “cryptocurrencies” – to denote the use of cryptographic methods and technology – or “virtual currencies” (VCs) – to denote their lack of legal recognition. There are, at present, more than 1,500 VCs in circulation, with dozens of new schemes being launched monthly, including initial coin offerings (ICOs). Most have failed to attract users, in particular in the major currency areas. The total value outstanding has fluctuated sharply, largely from speculative activity.
The global value of all VCs is currently around a fifth of the value of all euro banknotes in circulation and around 3% of the narrow monetary aggregate M1. Of course, these figures are probably already out of date, such is the volatility of the market. Having a million dollars’ worth of Bitcoin today would have required the simple investment of three million dollars in mid-December. Because holders can hide their identity and location, it is impossible to accurately analyse VC circulation in the euro area. But euro-related activity on exchanges represents a small share of global activity, and is concentrated on a small number of users.
While VCs remained an esoteric interest, it seemed sufficient for authorities to mostly observe and issue warnings here and there. But it is the dose that makes the poison. Now that VCs may grow to be economically significant, we need to reduce the risk of negative impacts on the economy.
In my remarks today, I wish to explain what it takes for something to be considered “money” – and how VCs measure up. I will then set out what I believe are some of the key regulatory questions that need addressing, and actions that need to be taken to mitigate the potential blowback from VCs to the rest of the financial system.
What is money?
Money has formed an integral part of human economic interaction for millennia. It has appeared in many forms – metallic currency, paper notes, cowry shells, cigarettes and even the great Rai stones of Yap.[2] Are VCs the latest incarnation of money? The answer for now, and indeed for the foreseeable future, is no. Economists generally define money as being a verifiable asset that fulfils three basic functions: a medium of exchange, a unit of account and a store of value.[3] How well do VCs carry out those functions?
Medium of exchange
Some VCs have attained patchy acceptance as a medium of exchange. The current largest, Bitcoin, is accepted by some retail outlets, but on a global scale these outlets remain small in number, and hardly any actual transactions have taken place. On a daily basis, there are around 284,000 Bitcoin transactions globally, compared with 330 million retail payments in the euro area. Indeed, a recent Bitcoin conference stopped receiving payment in Bitcoin because of the cost and time involved in processing the payments.[4]
Bitcoin is far inferior to existing payment options. Bitcoin transactions generally require confirmation from six miners. With each block taking around ten minutes to mine, you would expect transactions to take an hour to process. But with recent network congestion, the average time for one confirmation can easily exceed several hours.
At these speeds, if you bought a bunch of tulips with Bitcoin they may well have wilted by the time the transaction was confirmed.[5]
Bitcoin payments are also expensive. The recent cost of a Bitcoin transaction is €25, the same cost as carrying out 12,500 transactions on the incoming TARGET Instant Payment Settlement (TIPS). Bitcoin is heavily resource intensive, and certainly not a green technology. Bitcoin mining is estimated to currently consume energy at an annual rate of 46 TWh,[6] approximately 35 times the electricity consumption of all Tesla cars in the world.
In comparison, traditional payment services have made large strides in innovation. The instant payments scheme SCT-Inst was launched in November 2017 and the Eurosystem will implement the TIPS service in November 2018. A key characteristic of the instant payments scheme is that funds are made available to the beneficiary in, at most, 10 seconds for 0.2 euro cents. In TIPS, we aim to settle those transactions within a fraction of a second, in central bank money, with Europe-wide reach and interoperability. So it is with conventional technology, not with VCs, that genuine progress is being made in payment processing.
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