2012-10-29 European Central Bank - Virtual Currency Schemes

[Stephen Gornick]

The European Central Bank (ECB) published a 55 page report on virtual currencies, primarily on Bitcoin and Second Life Lindens (SLL).

Virtual Currency Schemes
 - http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf  (PDF)
 - http://docs.google.com/viewer?url=www.ecb.europa.eu%2Fpub%2Fpdf%2Fother%2Fvirtualcurrencyschemes201210en.pdf  <-- In a web-viewer

Here is forum discussion on it:

Good news; ECB 2012/10 report on virtual currencies
 - http://bitcointalk.org/index.php?topic=121186.0

ECB paper on Bitcoin and virtual currencies
 - http://bitcointalk.org/index.php?topic=121271.0

[Technomage]

This is huge. Bitcoin's legitimacy just took a massive step forward.

[Spekulatius]

TLDR: Whats it say? I heard its quite neutral. Correct?

[Technomage]

TLDR: Whats it say? I heard its quite neutral. Correct?

It is surprisingly neutral, yes, and it's fairly accurate as well. One of the best neutral reports on Bitcoin ever, definitely.

[Binford 6100]

seems they understand most of it. starts with types and classification of virtual currencies, their comparison and focuses on bitcoin and linden as showcases of different approaches.

quote from the paper
The

– They    see    Bitcoin    as    a    good    starting    point    to    end    the    monopoly    central    banks    have    in    the   issuance of money.

– They    strongly    criticise    the    current    fractional-reserve    banking    system    whereby    banks    can   extend their credit supply above their actual reserves and, simultaneously, depositors can withdraw their funds in their current accounts at any time.

– The   scheme   is   inspired   by   the   former   gold   standard.

[knight22]

Could have a negative impact on the reputation of central banks, assuming the use of such systems
grows considerably and in the event that an incident attracts press coverage, since the public may
perceive the incident as being caused, in part, by a central bank not doing its job properly;

LOL  

[Esoteric]

TLDR: Whats it say? I heard its quite neutral. Correct?

It is surprisingly neutral, yes, and it's fairly accurate as well. One of the best neutral reports on Bitcoin ever, definitely.

+1



A very well written and constructed article. They actually acknowledge the innovation of Bitcoin; some detractors say that Bitcoin offers nothing new, but it isn't always about the ingredients but about the recipe that makes something new. The ECB definitely recognise this. They have researched the topic well and provide numerous references for their statements.

While it is mostly uncontentious, there are a few points that would be worth addressing: the various risks assigned to Bitcoin. It is hard to accurately discern what proportion of these risks are a result from the lack of popularity with Bitcoin. They mention liquidity and operational risks but minor/ exotic ''real'' currencies can also carry similar risks. They don't quite seem to draw that parallel.

[Bitcoin Oz]

Protip: Get some bitcoins while they are still cheap.....

[sunnankar]

TLDR: Whats it say? I heard its quite neutral. Correct?

It is surprisingly neutral, yes, and it's fairly accurate as well. One of the best neutral reports on Bitcoin ever, definitely.

+1

A very well written and constructed article.

While it is mostly uncontentious, there are a few points that would be worth addressing: the various risks assigned to Bitcoin. ... They don't quite seem to draw that parallel.

For the most part I thought it was a very well written objective analysis of Bitcoin.

The do get into some advocation for the current systems like fiat currencies and central banks .... but what do you expect. Really, all the issues they raise with Bitcoin apply to their current fiat paper franchises. The 'trust in central banks' sludge is just oozing out of the report.

The bottom line is it seems they are now aware of their new competitor, realize it is not currently a threat but could become one so they will watch it. Just like postal services, news organizations and the copyright industry have been decimated so likewise when they try to catch it I doubt they can.

[kwukduck]

Fairly neutral indeed, but still a considerable amount of just false information about bitcoin.
Specially in an analysis like this you just can't make even small mistakes imho.

[kiba]

Fairly neutral indeed, but still a considerable amount of just false information about bitcoin.
Specially in an analysis like this you just can't make even small mistakes imho.

False information are the enemy of adaption to obstacles and adversaries.

[evoorhees]

We posted a response to this study on our blog:  http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

[sunnankar]

We posted a response to this study on our blog:  http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

Nice response.

Where have I heard this before? "holds a mirror to the current system"

We all know that if you are ugly then the solution is to blame and crush the mirror.

[evoorhees]

We posted a response to this study on our blog:  http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

Nice response.

Where have I heard this before? "holds a mirror to the current system"

We all know that if you are ugly then the solution is to blame and crush the mirror.

LOL

[keynet10]

I think the last page of the case study into Bitcoin is quite negative and pretty much scare mongering............

"Bitcoin is a high-risk system
for its users from a financial perspective, and that it could collapse if people try to get out of the
system and are not able to do so because of its illiquidity."

"Further action from other authorities
can reasonably be expected in the near future."

[jgarzik]

I think the last page of the case study into Bitcoin is quite negative and pretty much scare mongering............

"Bitcoin is a high-risk system
for its users from a financial perspective, and that it could collapse if people try to get out of the
system and are not able to do so because of its illiquidity."

"Further action from other authorities
can reasonably be expected in the near future."

That is not scaremongering, it is 100% accurate.  Right now, in its early stages, bitcoin is very high risk compared to many other financial instruments out there.

We know the S.E.C. is investigating Pirate and PPT (hopefully cleaning out the swamp), so, indeed, further action from authorities can be reasonably expected.

It is important to set expectations properly with bitcoin.  This is a high risk experiment; just like any startup business, there is a large chance of failure for any number of reasons.

[hazek]

so, indeed, further action from authorities can be reasonably expected

It would be really nice if you were a bit more precise in your use of language. Authorities? What or who gives them authority over what/whom? I certainly didn't give them any authority..

I also prefer to call them the factually correct: small gangs of thugs with guns.

[sunnankar]

"Bitcoin is a high-risk system for its users from a financial perspective, and that it could collapse if people try to get out of the system and are not able to do so because of its illiquidity."

That is not scaremongering, it is 100% accurate.  Right now, in its early stages, bitcoin is very high risk compared to many other financial instruments out there.

There is a big difference between collapse due to illiquidity and a collapse due to financial counter-party failure. So likewise there is a big difference between debt and equity based instruments.

The fiat currencies and fractional reserve banking system are debt based instruments. Inherent in their design is risk due to both financial counter-parties and illiquidity. For example, Lehman Brothers can fail resulting in Lehman Brothers bonds becoming worthless through counter-party failure AND/OR the market can lose demand for Auction Rate Securities resulting in 95% decrease due to illiquidity.

Gold and Bitcoin are equity based instruments and are no-one's liabilities. As such they stand immune to financial counter-party failure. Yes, the price could fluctuate due to market demand resulting in illiquidity.Gold will likely never become completely worthless. Bitcoin .... well it remains to be seen. Does a senior Bitcoin developer really think there is a material risk to systemic Bitcoin failure?

With equity based instruments there is really not that much to worry about because they become instruments of sovereign wealth. Unless you have a political agenda antithetical to freedom and do not want individuals to have access to instruments of sovereign wealth that allow for protection of property rights by preventing confiscation through inflation which is a form of taxation without representation. After all, the borrower is servant to the lender.

[ArticMine]

We posted a response to this study on our blog:  http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

A very good response, that also identifies the one flaw, in an otherwise well written report, namely failing to make the distinction between Bitcoin and Linden Dollars with respect to an issuer in the case of Linden Dollars and the corresponding counter party risk associated with that issuer. 

[evoorhees]

We posted a response to this study on our blog:  http://blog.bitinstant.com/blog/2012/10/30/the-ecb-report-on-bitcoin-and-virtual-currencies.html

A very good response, that also identifies the one flaw, in an otherwise well written report, namely failing to make the distinction between Bitcoin and Linden Dollars with respect to an issuer in the case of Linden Dollars and the corresponding counter party risk associated with that issuer. 

Well, they do make the distinction between the two if you read the whole report. But, I don't think they emphasized how important this distinction is. Indeed, most people don't realize the importance.... that's why they fail to see why Bitcoin is different from Beenz and Flooz