Earlier this week, Slovenia’s Financial Stability Board (FSB) issued a warning about the risks of purchasing, storing, and investing in cryptocurrencies.
“Investors in virtual currencies and other forms of coin that are the subject of an ICO … should weigh up whether the risks taken up align with their personal preferences and investment objectives”, read the press release.
Slovenia’s FSB consists of delegates from the Securities Market Agency, the Insurance Supervision Agency, the Bank of Slovenia and the Ministry of Finance, and is tasked with protecting the country’s financial system. The financial watchdog’s main concern revolves around the fact that cryptocurrencies — such as Bitcoin — are not regulated or backed by a central bank.
The latest warning from a threatened industry
While the news might come as a surprise given Slovenia’s reputation as a “CEE Bitcoin hub”, the announcement is not as dramatic as it has been made out to be. The same worry was expressed by JPMorgan CEO Jamie Dimon who recently called Bitcoin a “fraud” for not being backed by a government and controlled by a central bank. Slovenia’s warning is not unique to the CEE either; the central banks of Hungary, Poland, and Albania have each issued similar warnings as well.
The concern shared amongst the banks is not unsubstantiated, however. Cryptocurrencies are quite risky for a variety of reasons, including the fact that they are not created nor backed by a government or central bank. Cryptocurrencies ultimately attempt to create a store of value ex nihilo, and are only as valuable as the public perceives them to be. For this reason, they tend to be highly volatile and can result in large financial losses for those who invest. Moreover, a lack of regulation currently exists around cryptocurrencies — particularly ICOs — leaving investors vulnerable to duplicity by the currencies’ founders.
Nevertheless, the banks’ warnings illuminate only one half of the picture. Cryptocurrencies and the underlying blockchain technology ultimately pose a huge threat to banks as they eliminate the need for a middleman in financial transactions — a function that banks have traditionally provided and used as a primary revenue source. Accordingly, the banks’ warnings could reflect a fear of obsolescence as well.
Cryptocurrency innovation continues to disrupt
Despite the concern of central banks, interest in cryptocurrency throughout Slovenia and other CEE countries has recently soared. Multiple countries such as Slovenia and the Czech Republic have introduced Bitcoin ATMs and a number of businesses within the countries have begun to accept Bitcoin as a form of payment as well. Moreover, an ever-growing number of startups have held ICOs and token sales to fund their projects.
In an even stronger push for cryptocurrency, Kaspar Korjus, the Managing Director of Estonia’s e-Residency program proposed the idea of issuing a cryptocurrency managed by the government. The cryptocurrency, he suggested, could be launched through an ICO as a way for its e-residents to easily invest in the country.
His idea, while purely speculative, was shot down by Mario Draghi, the President of the European Central Bank, who said, “No member state can introduce its own currency; the currency of the eurozone is the euro”.
Other financial figures, however, have taken the opposite stance. Christine Lagarde, the Managing Director of the International Monetary Fund, has said that “virtual currencies might just give existing currencies and monetary policy a run for their money”, highlighting her belief in the future of cryptocurrencies.
Lagarde added, “Instead [of traditional payment methods], citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender”.
While the fate of cryptocurrency has yet to be decided, for the time being, it appears that it will continue to forge ahead.