The European Central Bank (ECB) has reiterated its position on digital currencies.
In a speech delivered at the at the ECB/Banca d’Italia Workshop on Interchange Fees, Yves Mersch, Member of the Executive Board of the ECB, said digital currencies are still too small to have an impact on retail payments and central banks.
Mersch reiterated what the ECB said two years ago in its Virtual Currency Schemes report, published in October 2012.
In the meantime digital currencies have gained quite a following, although they are still not even close to what could be described as 'mainstream'. In any case they are gaining popularity and as a result regulators around the world are starting to take notice.
Last December the European Banking Authority (EBA) issued a warning on potential risks related to virtual currencies, focusing on fraud and theft.
For its part, the ECB has remained silent on the matter since its 2012 report.
Phenomenon that shouldn't be ignored
However, this time around Mersch stressed that digital currencies should not be ignored despite their relatively small impact on the economy. Keep in mind that Mersch was talking about retail payments and interchange fees, hence the limited focus on other cryptocurrency-related issues.
"Many media commentators have been wondering what impact these currencies will have on retail payments and even on central banks. I agree that virtual currency schemes are an interesting phenomenon and should not be ignored or dismissed," he said.
"The ECB was one of the first public authorities to see their potential and their risks and published a detailed analysis in 2012. Despite the overall rise in the value of bitcoin since the publication of the report and the media attention it is getting, our conclusions still seem to be valid, namely, that such currencies are not (at least yet) economically important."
He went on to conclude that cryptocurrencies do not pose a serious risk to price stability or financial stability in Europe, but they do pose a risk for users, which is what European central banks and the EBA have been saying for months.
Interestingly, Mersch made a clear distinction between speculative investments in bitcoin and the use of bitcoin for payments.
"However, this user risk is more related to speculative investments and consumer protection, and not necessarily to payments. Nevertheless, we are closely following developments and keeping in touch with other authorities," he said.
A risk for retail?
Mersch said novel and unconventional challenges are facing regulators, but he did not offer any thoughts on digital currency regulation. The fact that he clearly singled out payments as a safer niche for bitcoin is encouraging, especially given the tone of his address and the focus on retail.
Consumer protection remains an issue in many situations, but in theory it could be addressed by bitcoin payment processors and merchants to some extent, although many argue that nothing short of real regulation will solve the problem.
Protection offers and buyer recourse are important for merchants and consumers alike. Merchants aren't exposed to financial risk if there is no protection in place, but they do stand to lose credibility or risk their reputation if something goes wrong.
At the same time, consumers cannot be expected to pay for big-ticket items using a payment method that effectively strips them of consumer protection. Both parties stand to gain from lower transaction fees: merchants can increase margins, while at the same time passing part of the savings down to consumers.
Sadly though, regulatory ambiguity and uncertainty are two sizeable hurdles that won't be overcome anytime soon.
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