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EU warns cryptocurrencies of central bank competition

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A recent report from the EU warns that Bitcoin and other cryptocurrencies are vulnerable to being torpedoed by central banks and other large financial players.

Commissioned by the European Parliament Committee on Economic and Monetary Affairs (Econ), the report on fintech competition suggests that cryptocurrencies could quickly become obsolete should central banks or major financial institutions start to issue their own digital currencies.

Any such new currencies would “reshape the current competition level in the cryptocurrency market,” and “broaden the number of competitors” faced by Bitcoin. The power of established financial institutions is such that they may be able to enforce their own vision of the future of digital currencies. For instance, “they may try to block access on interoperability grounds,” as has already occurred “in the market for payment services.”

However, the report notes that as yet there are no established financial players who have made the move into digital assets. At this “relatively early stage” it is still impossible “to assess… the type of competition challenges that they may pose in the medium term.

European challenges

Cryptocurrencies’ international nature poses particular problems for national or transnational policy makers. As the report says, “many of the players operate from global locations outside the jurisdiction of European competition authorities” which causes problems for the “investigation or prosecution on anticompetitive behaviours.

EU countries are well-represented when it comes to cryptocurrency wallets and exchanges, accounting for 42% and 37% respectively of the world market. However, it only has 13% of the cryptocurrency mining market. The report describes this as Europe’s “main weakness” as “mining is the most strategic, sophisticated and technology dependent activity in the cryptocurrency market.” Europe is falling behind Asia in crypto-mining and there is a “significant concentration of mining activities occurring in certain Chinese provinces.

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