Non-backed crypto-assets are not suitable as money

Unsuitable

DNB does not consider unsecured cryptos to be money because the exchange rate is too unstable to properly fulfill the functions of means of payment, store of value and unit of account. The lack of underlying assets and a monetary authority that stabilizes the value creates great uncertainty about the value. The many cryptos and the lack of coordination also make them unsuitable as a unit of account. The prices then have to be displayed in for example Bitcoin, Ether, Sol, Ada and XRP, which is confusing. The users of cryptoassets seem to be coming to the same conclusion. Only 3% of Dutch crypto owners indicate in 2022 that they have bought something with it (Cryptovaluta Monitor).

In addition, consumers in the Netherlands are already very well able to pay digitally. The Dutch payment system is safe, reliable and efficient. Within the Netherlands, payments are processed within seconds (“instant payments”). Speed ​​is therefore no reason to pay with cryptos in the Netherlands either.

The question is what explains the popularity of cryptos in the Netherlands and other developed economies. Recent international studies indicate that the aforementioned volatility and the lack of underlying assets make cryptos suitable for speculation or gambling. In line with this, a majority of Dutch crypto owners (63%) state that investing in cryptocurrencies is the same as gambling (Cryptocurrency Monitor). The prospect of making easy money with cryptos, which is widely described on social media, activates psychological factors such as the fear of missing out. Large price movements make it difficult to escape attention. To point out risks to young people, the Ministry of Finance has started the Smart in Crypto campaign.

The importance of strong institutions and payment infrastructure

The statistics show that cryptos are more often used to pay with in emerging economies than in developed economies. This difference can be explained by differences in institutions and infrastructure. For example, the use of cryptos as a means of payment is increasing as the financial sector is less developed, capital controls are increasing, the costs of payments between countries are higher and monetary institutions are weaker.

An extreme example is El Salvador, which has declared Bitcoin as legal tender. But even in El Salvador, Bitcoin is not gaining a foothold among the local population. People are often too poor to absorb exchange rate fluctuations, or they don’t have access to a mobile phone. The IMF (2022) therefore advises against the use of bitcoin as legal tender, pointing, among other things, to risks of high volatility for consumer protection and financial stability and risks to financial integrity.

Stablecoins useful for specific applications if properly regulated

The disadvantages of hedged crypto-assets as a means of payment have also not gone unnoticed in the crypto world. So-called stablecoins have therefore been developed for payments between different cryptos and for exchanging crypto for existing money such as the euro and dollar. The idea is that stability is created by a financial institution linking the value of stablecoins to underlying assets. In practice, however, the risks are still high due to a conflict of interest between the issuer and the holder of stablecoins. This is because the issuer can increase returns by investing in riskier assets or by maintaining insufficient coverage. This happens at the expense of the interest of the owner who counts on the cover, because otherwise there is a risk of a ‘run’ on the underlying assets.

The EU regulation on markets for cryptoassets (MiCAR, see also DNBulletin, 2022) therefore contains specific and supplementary rules for issuers of stablecoins, in particular regarding the assets that serve as a reserve for the issued stablecoins. This regulation, which is expected to enter into force in 2024, can contribute to the confidence of the market so that the specific uses of stablecoins are exploited. Incidentally, these are the first steps in relation to adequate regulation, because the crypto market is still changing. Legislation, regulations and supervision will also not be able to mitigate all risks, among other things due to the international nature of cryptos.

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