Bitcoin, a currency based on the blockchain technology whose price has soared by 1,700 percent this year, clearly has a “speculative character,” conceded Jens Weidmann, the head of Germany’s Bundesbank, to Handelsblatt in an interview. But that doesn’t automatically mean bitcoin, or other so-called cryptocurrencies, should be regulated. “Just because investors lose money, there is no reason to prohibit that,” Mr. Weidmann said.
That puts him at odds with, among others, Peter Altmaier, Germany’s acting finance minister. “We think it makes sense that the speculation risk of virtual currencies and their impact on the financial system should be discussed at an international level,” his spokesman said.
That aligns Mr. Altmaier with Bruno Le Maire, the French finance minister, who is leading the movement to clamp down on cryptocurrencies and will raise the issue at the next meeting of the G20, a forum of the world’s leading economies, in Buenos Aires in March. “My role is to protect savers,” said Mr. Le Maire. “The speculative risk of bitcoin is evident. If we all work together, we can regulate it.”
Currencies based on blockchain, and bitcoin in particular, have thus renewed the age-old debate between those who argue that capitalism is best left to regulate itself, with fear and greed balancing each other in the long run, and those who want state intervention to prevent bubbles that could crash the whole system.
US regulators are, at least so far, seeking a middle way. New products such as bitcoin futures in Chicago have been allowed, and banks are researching their own applications of the blockchain technology, which is at heart a manipulation-proof ledger that is distributed among many computers and can automatically process and settle transactions. The IRS, America’s tax-collecting agency, has won a legal battle and can now force Coinbase, the biggest US crypto exchange, to hand over information on individual users. And securities and derivatives regulators are scrutinizing ICOs, or “initial coin offerings.”
The European Union, on the other hand, is leaning toward stricter regulation. As a first step, it has already added rules on bitcoin in the revision of its anti-money-laundering regime, covering firms that “are in charge of holding, storing and transferring virtual currencies.” These companies will have to identify their customers and report any suspicious activity, the European Commission said. The rules have yet to be passed in national legislation.
Germany’s Federal Financial Supervisory Authority, called BaFin in short, issued a warning to investors in November against ICOs. BaFin said that such coin offerings leave investors vulnerable to fraudsters and that the investments are often nontransparent and volatile. But BaFin only regulates within Germany, and only one cryptocurrency exchange, bitcoin.de, is based in the country.
“If the price bubble bursts, it can quickly endanger individual institutions and parts of the financial markets.”
Most experts say that a crackdown, or even a ban, on cryptocurrencies in the US or Europe wouldn’t work anyway, because the biggest cryptoexchanges are in Asia, which is just a mouse click away. And yet many experts worry that the fad in bitcoin futures, cryptofunds and other highly speculative financial products will inflate a bubble as dangerous as the Dutch tulip mania in the 1630s, or the more recent market crazes.
Others are more sanguine. “So far we see little danger for the financial system,” a spokesman for the German finance ministry told Handelsblatt. “In terms of their market volumes, virtual currencies only play a niche role by comparison with the money supply of leading global currencies in circulation.”
The fans of cryptocurrencies see them as a source of independence from national governments that drove up inflation and government debt in the 1970s to boost their economies. “The invention of bitcoin is one of the most liberating technologies in human history,” said Roger Ver, one of the earliest bitcoin investors who has been dubbed “bitcoin Jesus.” He likened the impact of the technology to the invention of the printing press.
Some policymakers agree, such as Sven Giegold, a German member of the European parliament for the Greens. “A democratic state mustn’t immediately kill anything that moves in the financial markets,” he told Handelsblatt.
Volker Brühl, head of the Center for Financial Studies at Frankfurt’s Goethe University, disagrees. “The growth of cryptocurrencies poses a major threat,” he told Handelsblatt. “That’s because this market is totally opaque and virtually unregulated at present. If the price bubble bursts, it can quickly endanger individual institutions and parts of the financial markets and possibly even create a systemic risk.”
Astrid Dörner is a New York correspondent for Handelsblatt. Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Felix Holtermann is an editor on Handelsblatt’s finance desk in Düsseldorf. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin. Frank Drost is a Handelsblatt editor in Berlin, covering financial supervision and banks. Jan Mallien is a finance correspondent for Handelsblatt in Frankfurt. To contact the authors: email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com and firstname.lastname@example.org