Yes! The European Central Bank Gets This Right About Bitcoin!

European central bankers, on brand as ever, have shared a tersely worded cope-memo decrying bitcoin and its dastardly ways — and inadvertently made the case for never regulating it.

The essay doubles as a no-coiner bingo card of sorts. It’s a string of silly misnomers and half-truths: “Bitcoin is rarely used for legal transactions” and “the market valuation of Bitcoin is therefore based purely on speculation.”

But within the ECB’s musings, first published in German finance press Handelsblatt, there are a few points that actually ring true.

Director general Ulrich Bindseil and adviser Jürgen Schaaf rattled off an oft-cited criticism that says Bitcoin generates as much e-waste as the Netherlands (a statistic based on hotly debated modeling from former Dutch central bank collaborator Alex de Vries). 

Dovetailing with that tidbit, the pair rightly point out that depreciation of mining hardware (described as an inefficiency of the system) is not a flaw, but a feature. “It is one of the peculiarities to guarantee the integrity of the completely decentralized system.”

That’s entirely true. Capitalistic game theory dictates the bitcoin industry relentlessly develop faster and more energy-efficient mining rigs. Miners want to spend the same amount of energy for more bitcoin, so they’ll invent new mining rigs that will generate more hash rate with less energy.

Miners that can’t afford them (or can’t access credit) will inevitably fall to the wayside, prioritizing efficiency across the board above all else. 

In fact, the value proposition of the network relies heavily on its claim to decentralization; a bitcoin miner monopoly could very well render the network less valuable than if it were shared more equally — especially if they wield more than 51% of the hash rate.

This makes bitcoin mining as much a team game as it is a solo sport. 

The freedom to develop, invest and accumulate bitcoin mining rigs directly inspires decentralization. Chinese chipset maker Bitmain was once a powerhouse of bitcoin mining, and some might argue a deeply centralizing factor, controlling almost 51% of Bitcoin hash rate in 2018.

But infighting, restrictive regulations at home, and an untenable position in Bitcoin Cash has all but scrubbed Bitmain — which bases its entire business on the “inefficiency” of the Bitcoin system — from the mining map, with an array of bitcoin mining companies and pools taking its place.

The authors follow up that righteous Bitcoin factoid with another: Bitcoin should not be regulated as a form of payment or investment. 

Schaaf and Bindseil actually justify never regulating Bitcoin by claiming it “appears neither suitable as a payment system nor as a form of investment.” But fewer words from a central banker have rung as soundly as Bitcoin “should be treated as neither in regulatory terms.”

Yes. That’s an excellent Bitcoin mantra: Do away with government-powered, Sauron-style surveillance of the Bitcoin network. And while you’re at it, scrap the tax regulations.

The Internal Revenue Service considers BTC an asset just like property, which renders every transaction a taxable event. This obviously renders some crypto-folks’ quests to pay for coffee and burgers with bitcoin a pain in the ass. 

Let’s hope the ECB’s wise suggestion of keeping big government out of little bitcoin catches on.

---

Get the news in your inbox. Explore Blockworks newsletters:

• The Breakdown: Decoding crypto and the markets. Daily.
• Empire: Crypto news and analysis to start your day.
• Forward Guidance: The intersection of crypto, macro and policy.
• 0xResearch: Alpha directly in your inbox.
• Lightspeed: All things Solana.
• The Drop: Apps, games, memes and more.
• Supply Shock: Bitcoin, bitcoin, bitcoin.