EU Central Bank Comes Around on Crypto, Says They Pose No Financial Threat

On May 18, the European Central Bank (ECB) released a paper on crypto-assets and stated that they do not currently pose a threat to financial stability in the Eurozone.

Per the report, the ECB says the combined value of crypto assets is very small in comparison to the financial system, and their ability to be used as currency in the traditional finance sector is still limited.

Explaining more, the ECB says cryptocurrencies do not currently perform the functions of money, as only a very low number of merchants accept crypto such as Bitcoin (BTC). Therefore, the ECB states that it has no tangible impact on the real economy or monetary policy.

As stated by the Central Bank:

“The high price volatility of crypto-assets, the absence of central bank backing and the limited acceptance among merchants prevent crypto-assets from being currently used as substitutes for cash and deposits, as well as making it very difficult for crypto-assets to fulfill the characteristics of a monetary asset in the near future.”

What About Stablecoins?

Regarding stablecoins – a crypto asset that’s pegged 1:1 with the US dollar or another stable fiat currency – the ECB says these cryptos could be useful and less volatile if they were collateralized by central bank reserves.

However, they note that a stablecoin collaterized by central bank reserves could have implications for monetary policy due to additional demands from central banks.

Therefore, while the ECB is not in favor of issuing a digital currency backed by the central bank, they have explored this route extensively in the preparation of a new digital economy.

Expressing their interest, the ECB said:

“In principle, a [central bank digital currency] CBDC could be designed as a user-friendly risk-free asset that meets the public’s demand for an economy that is both digitalized and safe.”

Moreover, the ECB notes that while they are learning and researching about crypto assets, crypto currently falls outside of their regulatory regime and therefore can hardly enter the EU financial market infrastructures (FMIs).

Further explaining this last point, the paper states:

“Crypto-assets cannot be used to conduct money settlements in systemically important FMIs. To the extent that they do not qualify as securities, central securities depositories (CSDs) cannot undertake settlement of crypto-assets. Even if crypto-assets-based products were to be cleared by central counterparties (CCPs), these would need to be authorized and to satisfy existing regulatory requirements, albeit at additional costs and with no clear benefits to EU CCPs.”

Moreover, the ECB also states that the current regulatory frameworks for cryptocurrencies are sufficient to manage the risks and potential implications of the technology.

Do you think the ECB is underestimating the potential of cryptocurrencies? Let us know what you think in the comment section below.

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