Yves Mersch, Member of the Executive Board of the ECB, shares his views on virtual currencies and new innovations and technologies such as distributed ledger technology (DLT) and blockchain.
New innovations based on distributed ledger technology (DLT) and blockchain have brought about wide-spread euphoria. Their use to create “cryptocurrencies” or “virtual currencies” (VCs) – to denote their lack of legal recognition – is often touted as something that could fundamentally change the financial sector.
The spectacular rise in the market valuation of VCs over the past year suggests that many people shared this belief. In the course of 2017 the global VC pool both deepened, from USD 30 billion to USD 400 billion, and widened, with the proliferation of “initial coin offerings” or “ICOs” – virtual fundraising facilities for start-up investors.
Do VCs herald a new world of money? No, virtual currencies are a misnomer in the first place. They are not money, nor will they become money in the foreseeable future. They lack the official recognition and backing of a public authority. Their market share is still small, the amount of money at risk in financial market infrastructures is insignificant and their ties to the real economy are still limited.
But this can change. Authorities should therefore pay close attention to mitigating the potential risks that could stem from a growing VC market. There is need to be mindful not to have the complex and interlinked financial system contaminated by immature technologies or shallow business models. Interfaces and gatekeepers require particular scrutiny.
But he doesn’t want to sound too negative. It is not unknown for new innovations to bring about euphoria, which in turn fuels bubbles that eventually burst. Still, just because the initial euphoria subsequently fades, does not mean that the innovation itself is without virtue.
These virtual currencies are clearly not suitable for use as money, but the underlying technology may, in time, become useful and widespread. And although the ECB don’t intend to introduce a central bank digital currency for the foreseeable future, ECB is actively experimenting with the technologies. ECB will be able to cater for changing needs in trusted and stable central bank liabilities that are accessible to the citizens, if and when this becomes necessary.
Full speech
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