EU says bank-promoted cryptocurrencies will reshape market

July 23, 2018
Chris Wheal

A European Parliament study, published on Friday, said competition among existing cryptocurrencies remained limited and that bank-backed digital tokens would help “reshape” the market.

Study suggests banks could enter cryptocurrency market

The authors of the study suggested competition between digital currencies, while growing, was still skewed largely towards bitcoin: in March 2015 bitcoin accounted for 86% of the crypto market, and by March 2017 this had only decreased to 74%, while ether made up 16% in 2017.

Network effects

This led to so-called “network effects” that prevent a currency from being substituted by another competing one, resulting in “a substantial barrier to entry and, at the same time, giving incumbents large market power”.

In the worst-case scenario, the study suggested, these network effects could lead to smaller cryptocurrency operators throwing in with the larger ones to form cartels whose “collusive agreements” would result in further barriers to entry into the market.

Permissioned cryptos

One solution, the authors say, would be the arrival of permissioned cryptocurrencies promoted by banks – even by central banks.

“This would reshape the current competition level in the inter-cryptocurrency market, broadening the number of competitors,” the study said.

It added a caveat to this solution, however, saying the banks, once entering the market, might become the competition abusers themselves.

“Market power of incumbent banks might be used to limit competition in the intra-cryptocurrency market through pre-emptive acquisitions or predatory pricing schemes.”

Competition jurisdiction

The authors of the study admitted, however, that competition regulation would be difficult to administer given the many global locations outside of the jurisdiction of the EU from which cryptocurrency developers and exchanges operate.

“The international nature of cryptocurrency markets is a challenge to competition policy at the European level, and makes investigation or prosecution on anti-competitive behaviours more difficult.”

Post written by Chris Wheal
Chris Wheal is editor of OpenLedger's news and features service. An award-wining business journalists himself, he runs a team of freelance journalists from across the UK and north America.

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