The European Central Bank (ECB) has published a report stating that the crypto economy is growing fast, and could get to the point where crypto-assets pose a risk to financial stability.
In a report entitled “A deep dive into crypto financial risks: stablecoins, DeFi and climate transition risk”, the ECB outlines how the crypto-asset ecosystem has become “complex and interconnected”.
Three elements of the crypto sector are singled out for their particular importance. They are stablecoins, DeFi, and the large carbon footprint left by proof-of-work consensus blockchains such as bitcoin.
The report discusses how crypto-assets can have “spill-over effects” on the regulated financial markets, and how it is for this reason that “timely regulatory intervention” is needed.
The ECB has been beating the drum on bringing regulatory authorities across the globe together. It recognises that only if there is a common regulatory policy across all jurisdictions, can it really start to put some pressure on the Bitcoin network.
The report highlights how stablecoins “may not be so stable after all”, pointing to the TerraUSD crash, and the fact that Tether momentarily lost its peg.
The view is put forward that stablecoins don’t cut it as a means of payment in a real economy, and that urgent regulatory oversight and action was needed before they became a risk to financial stability.
When discussing DeFi, the ECB report makes similar recommendations, highlighting in its opinion the “opaque and anonymous nature” of the sector. It calls for an “internationally coordinated approach” to “mitigate the risks from DeFi.
Finally, the report covers the “disproportionate amount of energy” used by several crypto-assets, among them bitcoin. It posits that “government intervention is likely” and recommends that investors look at the ESG objectives of each cryptocurrency before investing in them.
It’s patently obvious that the ECB is extremely anti-crypto, firmly in line with the views of its president Christine Lagarde. These views are not fully shared across all jurisdictions, therefore some spadework is needed to push this agenda, and the European central bank needs to use its influence with other central banks in order to try and get them to coalesce around a global crypto plan.
Being firmly entrenched in the fiat monetary system, it is not surprising that the ECB is so against the financial innovation that the crypto sector brings. However, its dogged belief in a European central bank digital currency as a panacea for the ills of the system, may be very misplaced.
The crypto industry is suffering badly right now, and failing crypto lenders may set off a chain of contagion that could bring the sector to its knees. Be that as it may, the fiat monetary system is also on its last legs, and many believe that the system to replace it is quite likely to come out of the cryptocurrency sector. This might depend on whether the ECB does succeed in its aim of squashing the fledgling industry before it really gets going.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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