The European Banking Authority (EBA) has published an opinion on virtual currencies on Friday (here). The introduction is quite clear:
The European Banking Authority (EBA) published today an Opinion addressed to the EU Council, European Commission and European Parliament setting out the requirements that would be needed to regulate ‘virtual currencies’. The Opinion is also addressed to national supervisory authorities and advises to discourage financial institutions from buying, holding or selling virtual currencies while no regulatory regime is in place.
One would think that after the euro zone problems, the biggest argument against any virtual currency from the private sector would be connected to the ‘sustainability’ of sovereign debt, but: no. In the full document (pdf) the word ‘sovereign’ is mentioned twice (p.19), and not in the context of sovereign debt. So, why not use Bitcoins?
Bitcoins cannot be used to pay taxes, and therefore the single most important reason for a currency being of value is non-existent with the currency. So, the sovereign does not accept it, and the private sector cannot be forced to accept it (see page 13). Potentially, the value of a Bitcoin is zero, whereas the value of a dollar or euro is non-zero at minimum (because you can use them to pay taxes). Connected to this argument, sovereign states have access to their own currency in unlimited quantities (if the institutions allow it), which means government cannot go bankrupt. It also means that government does not have to borrow in order to spend, so that democratically elected governments face no outside constraints from the financial sector (as in the euro zone). Bitcoins are therefore not a democratic currency, but the opposite: the use of Bitcoin would make it potentially impossible for the government to spend if it wants to. If government could not borrow Bitcoins, it would have to refrain from spending! What is the point of democracy if the elected government cannot get the financial resources to do what the majority of the voters want it to do?
The EBA is right to point out the flaws of virtual currencies, but they miss the main point. Sovereignty is a question of control over one’s currency. Here is a 1935 quote of Canadian prime minister William Lian Mackenzie King:
Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws. Usury, once in control, will wreck any nation. Until the control of the issue of currency and credit is restored to government and recognized as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile.