Bitcoin and the dynamics of monetary systems:
A critical examination of the analysis by Bindseil and Schaaf (ECB)
The distributional consequences of Bitcoin
by Ulrich Bindseil and Jürgen Schaaf (ECB)
(Source)
The Federal Board of the Bitcoin Bundesverband comments as follows:
The analysis by Ulrich Bindseil and Jürgen Schaaf offers a critical view of the Bitcoin distribution effects, but ignores essential economic mechanisms that are necessary for a comprehensive understanding. This response aims to explain three key aspects that are overlooked in the paper: the zero-sum nature of monetary systems, the redistributive dynamics in inflationary and decentralized systems, and the role of political representation in promoting fair regulation.
1. the zero-sum nature of monetary systems and the shift between currencies
A fundamental mechanism that is insufficiently considered in Bindseil and Schaaf’s analysis is the zero-sum game inherent in all monetary systems. The value of a currency or an asset, whether it is a fiat currency such as the euro or the US dollar or an asset such as gold, real estate, shares or money such as Bitcoin, is not based on intrinsic value, but on the subjective trust and demand of users. When capital is reallocated – e.g. from euros to real estate, gold, shares, Bitcoin or the US dollar – the value of the original asset usually falls as the alternative gains in value. This process, which is central to economic cycles and market dynamics, illustrates how capital reallocations can lead to shifts between asset classes without necessarily “impoverishing” the holders of one asset class more than the others.
It is striking that the ECB paper lacks comparisons with gold. The perceived value of Bitcoin mirrors the value of gold, an asset that is highly valued despite the absence of direct cash flows, interest or dividends, and which similarly depends on scarcity and subjective trust. Friedrich Hayek noted in “Denationalization of Money” that competitive monetary systems lead to stable and trustworthy monetary alternatives. Bitcoin, with its capped supply and decentralized framework, is an example of an asset with lasting stability against inflationary policies often seen in fiat currencies.
2. redistribution effects in inflationary and decentralized systems
Bindseil and Schaaf argue that Bitcoin favors early adopters, leading to what they call an unfair redistribution of wealth. However, this dynamic is not unique to Bitcoin. Fiat-based systems that rely on credit-driven growth and expansionary monetary policy systematically redistribute purchasing power, typically favoring asset owners over lower-income groups as inflation erodes the purchasing power of savings. Joseph Stiglitz has described inflation as a “hidden tax” that hits those least able to counteract it the hardest. In contrast, Bitcoin’s redistribution takes place during the monetization phase when adoption increases, with wealth shifts thereafter determined by value creation rather than inflation.
Ludwig von Mises emphasized that inflationary policies undermine general purchasing power and lead to a redistribution of wealth in favor of those who have early access to newly created money. Bitcoin’s structure as a decentralized currency mitigates this type of ongoing, inflation-driven redistribution and protects holders from dilution through external intervention.
3. political representation and the importance of lobbying
The authors criticize the political commitment of Bitcoin proponents, but overlook the need for such representation to promote innovation in a decentralized system. The Bitcoin community is a bottom-up initiative, driven by individuals and companies committed to decentralized, inflation-proof monetary systems. Many of these actors have integrated Bitcoin into their business models and need regulatory certainty to operate effectively. As Bitcoin’s role as an alternative financial system challenges traditional paradigms, political engagement is not only strategic, but essential to prevent uninformed or restrictive policy decisions. As the paper notes, the number of crypto lobbyists in the U.S. has increased, which speaks to a need for informed representation in light of the evolving regulatory landscape. The Bitcoin community’s efforts are aimed at promoting fair regulation, not price speculation as claimed. By reaching out to policymakers, Bitcoin advocates are attempting to create an open framework in which decentralized systems can coexist with traditional institutions.
Additional counterarguments to certain assertions in the ECB paper
- Misrepresentation of Bitcoin’s purpose: The authors claim that “the original promise of Bitcoin” was to improve global payment systems, which is a misrepresentation of Satoshi Nakamoto’s intent. Bitcoin was designed to be a “better money” that would oppose centralized control and enable trustless transactions. This distinction is central to understanding Bitcoin’s function beyond a means of payment.
- Comparing volatility: The claim that Bitcoin is “too volatile” to serve as a store of value overlooks the fact that fiat currencies have lost significant purchasing power over time compared to Bitcoin or gold due to inflation. The euro, for example, has fallen by 90% compared to gold since its inception, suggesting that volatility is a relative measure and not an inherent flaw of Bitcoin.
- El Salvador’s experience with Bitcoin: While the ECB paper describes Bitcoin as a “failure” in El Salvador, the adoption in El Salvador shows how difficult it is to implement a top-down currency exchange. The adoption of Bitcoin continues to progress there, with around 8% of transactions currently reportedly being conducted in Bitcoin. This is significant for an emerging currency and should be seen as a reflection on implementation strategy rather than viability.
- The role of the Lightning Network: The paper neglects second layer solutions such as the Lightning Network, which compensates for the limitations of the Bitcoin blockchain by enabling scalable, fast and low-cost payments. Dismissing Bitcoin’s potential as a payment method without acknowledging these advances reflects a superficial assessment of Bitcoin’s evolving infrastructure
- Energy consumption and double spending: The authors criticize Bitcoin’s proof-of-work mechanism as inefficient. However, they fail to present comparative data on the costs and energy consumption associated with legacy banking infrastructure. Proof-of-work secures the network and prevents double spending without the need for a trusted third party. This is an advantage for users who value the security of decentralized transactions.
- Bitcoin as a speculative bubble: While the authors, or rather “the economists”, classify Bitcoin as a bubble, they do not address the ongoing demand and increasing acceptance as a store of value. Unlike fiat currencies, which depend on central bank policy, Bitcoin’s value arises from a transparent, decentralized supply model. As for Bitcoin’s lack of “productive potential”, its value lies in its ability as a censorship-resistant, resilient and inflation-insensitive asset.
Conclusion
The ECB’s analysis of Bitcoin by Bindseil and Schaaf appears to be based on a one-sided view that ignores relevant aspects, fails to take into account the structural problems in fiat systems, overlooks Bitcoin’s innovations and dismisses the social benefits of Bitcoin. In this light, Bitcoin represents a transparent, decentralized and long-term stable alternative that protects against inflation-induced redistribution. Its growth challenges the role of traditional banks and underlines the need for financial freedom. The ECB should embrace this innovation and engage in meaningful dialogue about how decentralized finance can coexist in global markets. Rather than inciting resistance, the ECB could benefit from recognizing the incentives Bitcoin creates for central banks to improve monetary policy for the benefit of society as a whole.
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