Crypto currencies’ potential implications for financial stability in Europe require “careful monitoring”, the European Central Bank (ECB) has said – though their combined value has not yet reached a point where they pose an immediate threat.
The ECB report, ‘Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures’, notes that crypto assets have raised concerns with regard to money laundering, market integrity and consumer protection, and have possible implications for the financial stability of the eurozone.
Produced by the ECB’s Internal Crypto-Assets Task Force (ICA-TF) – established 14 months ago to analyse virtual currencies – the 40p report concludes that, at present, crypto-assets’ “risks or potential implications are limited and/or manageable on the basis of the existing regulatory and oversight frameworks”. But it adds that “this assessment is subject to change and should not prevent the ECB from continuing to monitor crypto-assets, raise awareness and develop preparedness”.
The next generation of crypto-currencies
It says that crypto-assets’ combined value is “small relative to the financial system, and their linkages with the financial sector are still limited”. There are no indications so far that banks in the EU have systemically-relevant holdings of crypto-assets, it says. But the sector “requires continuous careful monitoring, as market developments are dynamic and linkages to the wider financial sector may increase to more significant levels in the future”.
Bitcoin is generally considered the first decentralised cryptocurrency, and became the crypto assets poster boy. Because crypto-currencies are accepted by few legitimate retailers, they have few applications in the real economy and have largely been viewed as speculative investments. But new forms of the technology are emerging, including so-called ‘stablecoins’ – whose values are pegged to physical assets.
These are cited in the ECB report as an “attempt to overcome the volatility drawback”. Media reports have stated that social-media giant Facebook is planning its own stablecoin. The ECB report says that some stablecoins are not crypto-assets according to the definition used in the paper, but “might qualify as e-money under some national legislation”.
The ECB’s report concludes that the “dynamic nature of crypto assets, including the development of stablecoins, warrants continuous monitoring”.
It says that: “In principle, implications for monetary policy could materialise in the event that crypto-assets were to turn into a credible substitute for cash and deposits.”
In January this year, both the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) released reports on crypto-assets in the EU context.
The EBA noted that “most crypto-assets typically fall outside current EU financial services regulation”. ESMA, meanwhile, warned that where crypto assets do not qualify as “financial instruments”, the absence of applicable financial rules leaves investors exposed to “substantial risks”. It said that, “at a minimum”, Anti Money Laundering (AML) requirements should apply to all crypto-assets and activities involving crypto-assets. It also recommended there should also be “appropriate” risk disclosure, so consumers can be made aware of the potential risks prior to committing funds to crypto-assets.