The European Central Bank has stated that cryptocurrency and digital assets are not a threat to the Eurozone.
In their most recent paper entitled “Crypto Assets: Implications for financial stability, monetary policy, and payment market infrastructures”, the overall value of the market is still too small to significantly impact the financial system. In addition to this, their connection to the financial sector is too small at the moment. In other words, mass adoption needs to happen before its impact can be really judged.
The scope of the paper was to consider the risks that investing in crypto-assets could have on investors and the market as a whole. The ECB monitors the market and has also analysed possible implications and risks that they may entail for the smooth functioning of market infrastructures and payments. In order to do this, the ECB set up the Internal Crypto-Assets Task Force.
The ECB recommend careful monitoring of the crypto asset market as “linkages with the wider financial sector may increase to more significant levels in the future.”
The report notes that currently, cryptocurrencies do not function as real money and have not had any affect on the economy. In addition to this they do not have “significant implications for monetary policy”.
“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,” the report added.
“The very low number of merchants that allow the purchase of goods and services with Bitcoin indicates no influence of the most prominent crypto-asset on price-setting” the report also claims.
One of the key findings of the report was also the fact that the sector requires “continuous careful monitoring” due to the fact that more linkages with the wider financial sector could increase to “more significant levels in the future”. The European Central Bank expressed a need for more clarity regarding the application of standards to create a more conducive environment for investments.
The EU Central Bank stated that; “Without prejudice to further work to be undertaken by the European Parliament, the Council and the Commission, the ICA-TF analysis suggests that a broader approach to regulation of crypto-assets could be pursued at the intersection with the financial system, where risks arise from unregulated so-called “gatekeepers” that provide an entry point for retail investors and regulated entities. Any regulation should also be balanced to avoid incentivising risky crypto-assets business.”
It was also noted that disjointed regulatory initiatives across the EU could trigger regulatory arbitrage and ultimately hamper the resilience of the financial system to crypto-asset market based shocks.
“Depending on how they will be regulated in the future, crypto-assets may more easily the FMI environment an deteriorate the FMI risk profile”.
The ECB is the central bank of the Euro and also administers monetary policy throughout the Eurozone. Established by the Treaty of Amsterdam in 1998, it is one of the world’s most important central banks and is one of the seven institutions of the European Union.