The European Central Bank (ECB) has stated that Bitcoin (BTC) will quickly begin a “path to extinction”. Why do certain legislators and regulatory bodies fear crypto so much, and what’s set to transpire going forward? Leona from Crypto Lists explores more.
In a post released Wednesday, the ECB stated that the famous crypto coin is very rarely used for real-life transactions and that the network behind it is “complicated, slow, and costly” for financial operations. The European Central Bank says, “Bitcoin hasn’t been used considerably for lawful real-life transactions.” Essentially, the ECB said that Bitcoin’s primary use is for illicit activities.
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Does the ECB dislike Bitcoin?
It seems like a fairly simple ‘Yes’. But maybe there’s more. One of the worst losses in the history of the cryptocurrency industry was caused by the failure of the FTX exchange, which was once worth $32 billion. The timing of the statements from ECB policymakers is perfect. The US Federal Reserve’s increased interest rates have also contributed to a gloomy market atmosphere this year.
The European Central Bank (ECB) isn’t the only major financial organization that hasn’t always supported digital currency. The collapse of the FTX crypto has prompted policymakers and regulators worldwide to reevaluate their stance on digital currencies. Several efforts have been made to normalize cryptocurrency use since the bull market of 2021, which saw unparalleled adoption rates. Authorities, meanwhile, have voiced concerns that Bitcoin (and crypto in general) could undermine public trust in the world’s most prestigious financial institutions.
Reasons why DeFi is a threat to central banks
Differentiating characteristics of DeFi from conventional finance include its emphasis on transparency and composability, its use of crypto-assets, and its system of governance. Users in the network always handle their virtual currencies directly without needing a trusted third party or custodian. Code guided by preset rules takes the place of centralized and controlled intermediaries to create faith in the system. Participant transactions are carried out through smart contracts in accordance with a set of preset rules that necessitate minimal to no human intervention.
DeFi’s primary financial offerings are uncontrolled and decentralized versions of equivalent traditional banking services outside the crypto-asset ecosystem. The most popular DeFi apps offer credit services, such as loaning crypto-assets against crypto-collateral or automating virtual currency trade against liquidity pools that also comprise crypto-assets. It’s not hard to see why the ‘old world’ banking giants have problems with these ideas. It’s a direct threat to their monopoly.
Some of the benefits and downsides of Defi and Crypto regulations
Cryptocurrency markets have benefited from regulation since it has increased investor confidence, increased the flow of capital into the sector, encouraged innovation, and reduced fraudulent and illegal activity. Although not everybody is persuaded, this might also be the case for DeFi, and these two factors, familiarity and knowledge can be powerful catalysts for widespread uptake.
Forcibly imposing regulations on DeFi may not be the most effective strategy. However, applying these same criteria to human-written code, i.e., smart contracts, is a mind-bogglingly complex process, given that traditional restrictions relate to transactions involving people. However, encoded concepts could be used to develop standards.
This would entail establishing capital limits and developing risk control systems for private operators in this sector. However, as this runs against the basic tenet of decentralized finance (i.e., decentralization), it will necessitate a forward-thinking and collaborative attitude from the DeFi community, as well as a focus on innovation on the part of regulators.
The ECB’s war against crypto: a conclusion
DeFi and cryptocurrencies have always been moving back and forth with regulatory bodies on introducing more laws in this digital landscape. Stricter regulations can lure more investors into the crypto space because of the trust they put in financial laws to protect their funds. It’s not a straightforward ‘yes’ or ‘no’ debate, but one of nuance. However, crypto is here to stay and the old world must keep up with the new, or risk being left behind.