Let’s start with some context:

(if  you are in a hurry, you can skip this part and jump straight to the article)

After a long autumn break, I would like to dedicate a couple of blog posts to a topic that I find fascinating: The Bitcoin (BTC) and the Blockchain!

Last year, more and more people have been asking me whether or not to invest in Bitcoin. In these situations, I felt rather embarrassed because of my blank face and my inability to make any ‘intelligent’ statement. Finally, decided to step out of my comfort zone and conduct some research on the topic. I spent the last few months (rather obsessively) reading and collecting any kind of information I could find (e.g. newspaper articles, research publications, documentary films, geeky articles about how to become a BTC miner!). I find it striking that, academic research and comprehensive articles on the topic were that scarce. Most documents I found were from BTC trading platforms or companies trying to sell some BTC related services and applications.

Therefore, I decided to write a couple of articles on the Bitcoin. My main purpose is to share with you an open-minded analysis that combines my recent research on the topic and my so called ‘expertise’ as an economist. Sorry to disappoint, but I will not be able to tell you whether of not to invest in Bitcoins. You can find plenty of newspaper articles on the topic, with changing perspectives like the weather forecast.

The Bitcoin debate evolving every day, I am not sure that I can always give you definite answers. Nevertheless, I will try to point out to some policy, economic, ethics, and environmental issues that are worth thinking about. Please let me know (by leaving a comment) if you want me to dig into a particular area regarding the Bitcoin and Blockchain technologies.

Bitcoin, the bugbear of Central bankers: Oh no, you are not a currency!

1. Vitor Constancio, the Vice President of the European Central Bank said “Bitcoin is not a currency but a mere instrument of speculation”. He also added, “Bitcoin is a sort of tulip, it’s an instrument of speculation … but certainly not a currency and we don’t see it as a threat to central bank policy.”

I was puzzled that Mr. Constancio, mentioned a possible threat to the ‘central bank policies’. Also having worked for him in the past, I tend to believe that the authorities generally said ‘not to worry’ when the situation seemed ‘alarming’ to their eyes. A couple of questions came then to my mind:

• The BTC…a possible danger for central bank policies? Was this related to the abundant money creation in the US, UK and the euro area going on  for almost a decade?
• Were the historically low interest rates to blame? After all, having savings in EUR, USD, GBP in your bank account did not really bring real earnings over the past years.
• Was there a general problem of ‘trust’ in central bank policies or the current banking system overall?

Besides all this, it was not clear to me why we had to choose between a fiat currency (e.g. euro) and virtual one (BTC)? Couldn’t various currencies co-exist all together, as they well did the past?

Unfortunately, I do not have the answers yet.

2. I was in a seminar last week where Francois Villeroy de Galhau, the Governor of the Banque de France, told us “Bitcoin is in no way a currency or even a cryptocurrency”. He also qualified the Bitcoin as a ‘speculative asset’ and added that its value and extreme volatility had no economic basis, and they were nobody’s responsibility.”

The main message of the governor was clear: “Those investing in Bitcoin, they do so entirely at their own risk!”. In other words, his institution should not be held responsible for the losses incurred by BTC!

Hey, Bitcoin you rather look like a currency to me!

Listening to central bankers made me extremely confused. To make up my mind, I needed to confront these statements with the facts. A quick Google search revealed:

• I could buy bitcoins online in a few clicks
• The use of Bitcoin was not reserved to drugs, terrorism and illegal transactions
• In addition to numerous online merchants, a growing number of physical shops in Paris accepted BTC as a payment method (e.g. hairdressers, cafes, restaurants, pizzerias, jewellery shops, art galleries).
• SAMU social, a major charity organisation in Paris was collecting donations in BTC!

All in all, the Bitcoin seemed ‘present enough’ in our financial system: I could use my credit card to buy bitcoins in a few click. I could then use these bitcoins as a medium of exchange, to buy various goods and services. So, what was a currency after all? (Perhaps a good topic for the next post)

Regulation is key

My take is the following: Instead of kicking the can down the road, isn’t it time for our policy makers to take some responsibility? Wouldn’t be more productive to think about how to regulate the Bitcoin rather than declaring that it does not exist as a currency?

Regulation is key to control the extreme volatility of BTC and avoid large losses for investors. For instance, taxing speculative BTC transactions could be a good start. Moreover, regulation could help to prevent the use of bitcoins for illegal/criminal activities (drugs, prostitution, terrorism), tax avoidance, money laundering, and so on.

Obviously, the regulation of a virtual currency is a highly complex issue. A couple of questions come to my mind: What would be the competent authority to regulate the Bitcoin?  Under which jurisdiction shall a global currency be regulated? How would it be possible to regulate transactions in an anonymous payment system? And the list goes on…

In a nutshell, denying the existence of the Bitcoin is not the solution. I believe, it is time for our policy makers to step outside of their comfort zones and face the regulatory challenges that our ‘modern times’ bring.