New ECB paper: "Bitcoin holders get rich at the expense of others"
European Central Bank (ECB) employees Ulrich Bindseil and Jürgen Schaaf have written a new academic paper on Bitcoin. In it, they paint a scenario in which the price continues to rise in order to show that this would have negative social effects.
They conclude "that the consequences of the Bitcoin-as-an-investment vision with perpetually increasing Bitcoin prices imply a corresponding impoverishment of the rest of society, endangering cohesion, stability and ultimately democracy".
Based on this, they appeal to those who do not hold the asset to take a stand against Bitcoin.
In any case current nonholders should realise that they have compelling reasons to oppose Bitcoin and advocate for legislation against it, aiming to prevent Bitcoin prices from rising or to see Bitcoin disappear altogether. Latecomers and non-holders and their political representatives should emphasize that the idea of Bitcoin as an investment relies on redistribution at their expense. Failing to do so could skew election results in favour of politicians who advocate pro-Bitcoin policies, implying wealth redistribution and fuelling the division of society.
From the paper
The authors
ECB employees Bindseil and Schaaf have already made a name for themselves in the Bitcoin community. Among other things for the guest article in the FAZ with the headline "Don't be fooled by Bitcoin!" In an interview with the FAZ, Schaaf also emphasized that Bitcoin has a maximum fair value of zero in financial mathematics and that the overall social value is even negative in his view.
The fact that in their new paper they discuss what the consequences would be if Bitcoin continued to rise caused a smile in the Bitcoin community. Two years ago, in the midst of the bear market, they predicted that the asset would disappear into insignificance - Blocktrainer.de reported.
The value of bitcoin peaked at USD 69,000 in November 2021 before falling to USD 17,000 by mid-June 2022. Since then, the value has fluctuated around USD 20,000. For bitcoin proponents, the seeming stabilization signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance – and this was already foreseeable before FTX went bust and sent the bitcoin price to well below USD 16,000.
From the blog post at the time
Since this blog post was published, the price of Bitcoin has roughly quadrupled in euro terms.
Ulrich Bindseil and Jürgen Schaaf, who both work in the ECB's Market Infrastructure and Payments Division, are - unsurprisingly - not only staunch Bitcoin critics, but also strong advocates of a central bank digital currency (CBDC).
"The distributional consequences of Bitcoin"
The ECB employees' paper entitled "The distributional consequences of Bitcoin" was published on October 12, 2024 on the SSRN platform for publishing and sharing research papers.
In the introduction, the authors directly deny Bitcoin any use - except for criminal activities.
Cryptocurrencies remain the financial product of choice among financial predators, lawbreakers and criminals worldwide.
From the paper
They also claim that the Bitcoin vision of being a means of payment has failed.
Even 16 years after its inception, real Bitcoin payments, i.e. effectively „on chain“, are still cumbersome, slow and expensive. [...] the Bitcoin narrative has changed gradually for some years away from the means of payment idea of the Whitepaper to Bitcoin as an attractive investment, the price of which would significantly increase over time.
From the paper
To attack Bitcoin from a different angle this time, they assume that the price will continue to rise, making BTC holders increasingly wealthy. And since they assume that Bitcoin is not increasing the overall economic pie, they conclude that the wealth of Bitcoiners is materializing at the expense of other people.
Bitcoin wealth has, as any wealth, positive consumption effects on Bitcoin owners. At the same time, since Bitcoin does not impact on the production potential of the economy, these positive consumption effects must be at the expense of some other usage of GDP, so either the consumption of the rest of society, or investments, or the current account (“GDP = Consumption + Investment + current account").
From the paper
In the model, the early investors sell their Bitcoin to the latecomers over time, in return for which the latter reduce their consumption or investment. The latecomers are then supposed to suffer because they have to cut back on their other financial activities - in favor of those who "cash out".
In absolute terms, early adopters exactly increase their real wealth and consumption at the expense of the real wealth and consumption of those who do not hold Bitcoin or who invest in it only at a later stage.
From the paper
Bindseil and Schaaf also visualize this using graphics.
Within their model, Schaaf and Bindseil also recognize that it would theoretically be better to be a latecomer than to never hold Bitcoin.
The people never holding Bitcoin would be even worse off compared to the Latecomers.
From the paper
The implications
Building on their findings, Bindseil and Schaaf attempt to explain that Bitcoin's success can divide society and cause frustration among the laggards.
The new Lamborghini, Rolex, villa, and equity portfolios by early Bitcoin investors do not stem from an increase in the economy’s production potential; rather, they are financed by diminishing consumption and wealth of those who initially do not hold Bitcoin. It’s like filling one bucket by draining water from another — the latecomers have to give up for the benefit of the early holders. Thus, “missing out” on Bitcoin is not merely a lost opportunity for wealth accumulation, but means real impoverishment compared to a world without Bitcoin. This redistribution of wealth and purchasing power is unlikely to occur without detrimental consequences for society. Even if the Latecomers cannot attribute their loss of purchasing power, they will feel a malaise and frustration, that will contribute further to an ever more split society.
From the paper
The ECB staff's previous angle of attack was that the Bitcoin price would eventually collapse, causing great harm. Now, interestingly, they imply that an ever-rising price would also be problematic.
In this paper, we show that even a Bitcoin-positive scenario, in which the Bitcoin price continues to rise (and the “bubble” diagnosed by critics does not burst) is problematic from a social perspective, as all the wealth-effects enjoyed by the early adopters through the rising prices would be at the expense of the latecomers (or non-holders), who are impoverished.
From the paper
Therefore, as mentioned at the beginning, they appeal to the current non-Bitcoin holders and their political representatives to take action against Bitcoin - among other things because BTC could endanger democracy.
Another slap in the face from the ECB
Bitcoin is a decentralized, non-confiscable money that can make the world a better place on many levels. For example, Bitcoin helps people in totalitarian regimes to store their monetary energy in a commodity that no one can take away or inflate. This is reason enough to choose to live in a world with Bitcoin - especially when you consider how many people around the world suffer from hyperinflation of local currency or authoritarian leaders.
Bitcoin proponents also believe that hard money would have a positive impact on human productivity and real economic growth. This is supported by the fact that in the past, harder monetary standards and lower inflation rates were accompanied by higher inflation-adjusted growth in gross domestic product.
High industrialization and the german "Wirtschaftswunder" and "post-World War II prosperity" in the USA, which laid the foundations for our current prosperity, occurred during the time of the gold standard.
The fact that, according to Bindseil and Schaaf, Bitcoin is not intended to increase society's productivity is partly due to the misconception that Bitcoin does not allow for more efficient payments. Criticizing the limitation of the main network for everyday payments would be like criticizing the Federal Reserve's centralized settlement network Fedwire for the fact that you can't buy coffee through it. Fedwire finalized around 6.5 transactions per second in 2021 - roughly the same as Bitcoin.
There are also different "layers" for everyday payments in the fiat money system. For Bitcoin, for example, there is the Lightning network, which finalizes BTC transactions in a matter of seconds for costs close to zero - without having to rely on corruptible middlemen such as payment service providers.
The authors also do not seem to understand that Bitcoin's innovation is not to solve the problem of double-spending in a payments system, but to do so in a digital and, above all, decentralized money network. And to ensure that decentralization can actually be guaranteed, proof-of-work is essential.
While it is true that the history of transactions of the Bitcoin network is “impractical for an attacker to change”, it is unfortunately also true that proof-of-work is highly impractical itself as it is costly and inefficient compared to alternative ways to secure the safety and prevent double-spending of a payment instrument. The problem of double-spending is hardly an issue in payments (because it is generally solved without particular difficulties, and certainly with far less social cost than those incurred in the solution offered by Bitcoin).
From the paper
The claim that Bitcoin is the tool of choice for criminals is also misleading in the least. According to blockchain analytics firm Chainalysis, the share of total crypto transaction volume associated with illegal activity was just 0.34% in 2023 - and the trend is falling. The proportion is likely to be significantly higher for the euro and US dollar. The United Nations Office on Drugs and Crime (UNODC) estimates that between 2 and 5 percent of global economic output is laundered every year.
If Bindseil and Schaaf's previous articles made it sound as if people should feel sorry for Bitcoin holders because they are so stupid and will one day lose all their money, the new work seems to want to convey a feeling of envy.
But the Bitcoin network is - in contrast to the fiat money system - fair and almost everyone would have had the opportunity to mine some Bitcoin with their PC virtually free of charge if they were already alive in 2009. In the Bitcoin community, the phrase "everyone gets Bitcoin at the price they deserve" has become established.
Everyone should have been familiar with Bitcoin for a few years now. The supposed frustration of previous non-Bitcoin holders should probably be channeled towards those who predicted two years ago, when prices were below USD 20,000 per Bitcoin, that Bitcoin would now disappear into insignificance again.
Bitcoin is also as fairly distributed as a new money that first has to be put into circulation can ever be. The inventor Satoshi Nakamoto did not enrich himself and even waited for other people to join in before he mined blocks himself after the Genesis block.
According to the latest data from asset manager Bitwise, private individuals control more than 50 percent of all Bitcoin ever in existence. Even if this can only be an approximation of reality, as Bitcoin addresses cannot easily be assigned to specific entities, it is encouraging that the transfer of wealth through Bitcoin does not make those who already hold it even richer. Companies and governments together hold less than 6 percent of all Bitcoin.
Bitcoin is also becoming better distributed over time. This can be quantified using the Supply Equality Ratio (SER). This measures the ratio of the Bitcoin holdings of addresses with low holdings to the Bitcoin holdings of the top 1% of addresses. A higher SER indicates a better distribution of the total supply. The SER of Bitcoin continues to increase over time.
Furthermore, the SER of Bitcoin is significantly better than that of other crypto assets such as Ethereum or Ripple.
New framework for Bitcoin bans?
Based on the premise that the success of Bitcoin endangers democracy and divides society by impoverishing those who were not early adopters in relative terms, new demands for a ban can theoretically be formulated and an anti-Bitcoin lobby mobilized.
It seems as if the ECB employees want to create a basis here under which Bitcoin could be banned. This is not far-fetched either, as Jürgen Schaaf even posted a statement on 𝕏 in which the author flirted with crypto bans.
It remains to be seen whether the narrative of the paper will establish itself as a new narrative with which politicians and the media will attack Bitcoin. Only time will tell whether non-Bitcoin holders will then campaign against Bitcoin or whether they will realize that it is perhaps better to be in as early as possible.
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