DNB: ‘Cryptocurrencies are not suitable as means of payment’

De Nederlandsche Bank (DNB) sees no future for cryptocurrencies as a means of payment in the Netherlands. To function as money, cryptocurrencies are too unstable, underutilized for transactions, and inconvenient to count on. “In countries where it is legal tender, such as El Salvador, it is not a success either,” says DNB director Steven Maijoor.

But cryptos and the underlying blockchain technology are not going away either, he immediately adds, during the presentation of a DNB study on cryptocurrencies and regulations. “We clearly see the benefits of the underlying technology,” says board member Olaf Sleijpen. These are mainly in the processing and recording of data and transactions. “There are childhood diseases, such as energy guzzlers, but they are being eliminated more and more. A ban on cryptos is therefore not the way forward.”

The last time DNB commented on cryptos in a policy evaluation (2018), around 900,000 Dutch people owned this kind of digital currency. There are now two million, although these cryptocurrencies are mainly used to speculate or take a bet.

Nevertheless, cryptocurrencies now affect almost all tasks and activities in DNB, and regulation is slowly getting under way. In order to prevent money laundering and terrorist financing, trading platforms and providers of ‘wallets’ (digital wallets) aimed at the Dutch market have had to apply for registration with DNB since 2020. It provides virtually no consumer protection. In addition, there are players who do not comply with this registration obligation. In April, the large trading platform Binance was therefore fined more than 3.3 million euros by DNB.

Also read: DNB makes the supervision of crypto companies a little less strict

Expanding sector

Since the previous survey, the crypto sector has expanded significantly and is becoming more and more intertwined with the traditional financial system. This is due, among other things, to the fact that investors and banks are active in both the traditional market and the crypto market. “Then you have to steer it in the right direction,” says Maijoor. There are fears that sharp fluctuations or the collapse of a major player in the crypto market could spill over into the traditional financial world, although so far this has only happened to a limited extent.

Regulations are being worked on worldwide, and studies are being published to lay the foundation for this, including the International Monetary Fund.

The European Union is at the forefront of writing crypto legislation. Political agreement was reached this summer on the ‘MiCAR’ regulation, which must enter into force in 2024 and be anchored in national regulations by then. MiCAR is an attempt to combat market manipulation and better protect consumers. In the Netherlands, the supervision of compliance will lie with DNB and the Dutch Authority for the Financial Markets. It is not yet clear how exactly they will divide it up.

Supervision is a challenge and can only be achieved through international cooperation, says Maijoor. Globally, there are a number of very large companies active in the crypto market, such as Tether and Binance. They establish their headquarters in a place with limited rules. Because the coins are based on decentralized technology, where a network of computers takes care of the administration, no one is responsible if something goes wrong.

Also read: European banking regulator worried: Not enough crypto experts for new law

DNB’s investigation, which also examines the possibilities for regulation and enforcement, touches on the core idea behind many cryptocurrencies. Its creators are generally extremely critical of banks and the role of central banks in controlling the amount of money in circulation. “You can say that we are biased,” says Sleijpen, “but it is very difficult to have a monetary system where you have no central bank and no authorities with certain areas of responsibility.”

In its attempt to get hold of cryptos, DNB has looked as much as possible at the function they fulfill and at their coverage. This makes the central bank much more positive towards so-called stable coins than about unsecured cryptos. Stablecoins are cryptocurrencies that are backed by regular assets – such as assets in euros, dollars or bonds – and promise to be exchangeable at a fixed rate against, for example, the dollar.

Transaction costs

DNB expects stable coins to play a role in cross-border payment transactions, provided they are regulated. Especially in countries where money transfers abroad are expensive. Outside the EU, it is often 6 percent or more of the transaction costs. With crypto payments, national borders are irrelevant to transaction costs.

But if unsecured cryptocurrencies are not a suitable means of payment, then what are they? Can it be compared to goods or gold? Sleijpen: “No. It is actually not something real, something tangible. You can’t do anything about it. You can say that the underlying technology is usable and applicable, but unsecured cryptos are not.”

It apparently represents a certain value, he says. “There is demand for what there is supply. But it is not money and it constitutes a highly speculative asset, let me put it this way. But it’s also a bit ‘what the madman will give’.”

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