ECB paper mischaracterizes Bitcoin, fails to highlight the problems of fiat

A European Central Bank (ECB) paper has mischaracterized Bitcoin, while also failing to highlight similar problems with fiat, a crypto executive says.

The paper, “The distributional consequences of Bitcoin,” published on Oct. 22 by ECB director Ulrich Bindseil and advisor Jürgen Schaaf, claims Bitcoin needs to be regulated to prevent its price from rising or should be outright banned.

Bindseil and Schaaf argue, among other things, that early Bitcoin adopters profit at the expense of new adopters, which hurts the economy and worsens economic inequalities.

Speaking to Cryptopolitan, John Haar, managing director at Bitcoin platform Swan Bitcoin, says the ECB paper has mischaracterized digital assets and failed to highlight the problems of “perpetually inflated fiat currencies.”

In one section, the authors argue that Bitcoin doesn’t increase the economy’s productive potential and that the only ones benefiting from the digital asset are early adopters.

Haar says that widely used fiat currency, a government-issued currency that’s not backed by a physical commodity such as gold or silver, has the same issue.

“The reality is that the creation of fiat currency out of thin air does not increase the productive potential of the economy,” he said.

Instead it serves as a stealth redistributive tax, where recipients of the newly created money benefit, along with wealthy asset owners, at the expense of existing holders of money who do not receive the newly created money and/or those who do not already hold significant wealth in financial assets.

Depreciating fiat currencies the issue, not Bitcoin

Another central argument in the paper is that if the price of Bitcoin keeps rising, its existence will impoverish both non-holders and latecomers.

The pseudonymous creator of Bitcoin, Satoshi Nakamoto, outlined in the Bitcoin whitepaper how it could function as both a payment method and a store of value against rapidly depreciating fiat currencies.

“To the extent that Bitcoin holders benefit from price rises, it is largely because of the perpetual inflation of fiat currencies, which causes people to voluntarily choose Bitcoin instead of fiat currency,” Haar said.

“If the ECB is claiming that holders of their own fiat currency will become impoverished as a result of the existence of a monetary asset whose supply cannot be inflated, what does that say about the ECB’s management of their own fiat currency?”

Fiat currency has no cap. Critics argue this makes it unsuitable for use as a national currency because it can be printed in potentially unlimited quantities, devaluing it. In contrast, Bitcoin has a hard supply cap of 21 million.

Stocks and real estate already exploit latecomers

At the same time, the ECB paper argues that those who adopt Bitcoin early and benefit from its price appreciation are doing so at the expense of those who are late to embrace the digital asset.

Haar says other investments, such as stocks, function the same way; investors aim to buy assets low and sell high across the board, not just Bitcoin. This system has existed far longer than digital assets.

“If the same claim were made about early buyers of Microsoft stock benefitting at the expense of late adopters of Microsoft stock, we would all reject this claim,” he said.

Early buyers of tech companies’ stock, such as Microsoft, Apple, and Amazon, benefitted significantly when the price skyrocketed; many cashed out.

Haar argues the same criticism can be leveled at real estate as well, with the median price of a home sold in the US rising on average 17 times higher from 1971 to the modern era.

“Does the ECB believe that baby boomers who own real estate have impoverished those who bought real estate later, or impoverished those who don’t currently own any real estate at all?” Haar said.

Another research paper by the Federal Reserve Bank of Minneapolis has also suggested assets such as Bitcoin should be highly taxed or outright banned to help governments maintain deficits.

In the Oct. 17 working paper, the Minneapolis Fed said in an economy where the government is trying to maintain a permanent deficit using nominal debt, Bitcoin creates a problem for implementing policy.