In what will be seen as a positive step for crypto, the European central bank (ECB) has come out and said that cryptos are no threat to the financial stability of the Euro zone.
The European central bank communicated this through its paper which was published on May 17. In the paper, the ECB says that the combined value of crypto assets is small, relative to the financial system, and links to the financial system are still quite limited. The paper also points out that there are banks in the EU that do not appear to have “systemically relevant” crypto holdings.
Debunking the Euro Zone Financial System Panic
The paper also debunks the notion that crypto will destroy the Euro zone’s financial order by stating that cryptos do not perform the functions of money. At present, a “very low” number of merchants are accepting cryptos in exchange for goods or services, which means there is very little tangible impact on the economy according to the ECB paper.
According to the ECB, “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”
The paper also addressed the stablecoin development stating that cryptos can be less volatile if they are collateralized by central bank reserves. If that happened though, demand for central bank reserves would go higher which would likely have implications for monetary policy and implementation according to the paper. The ECB also does not favor the idea of a Central bank digital currency but is open to more exploration.
“In principle, a 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,” the ECB says
Cryptos don’t fit into EU Payment Structures
The paper also has it that cryptocurrencies fall outside the scope of current EU payment services regulation, which means that cryptos would have a hard time fitting into the EU financial market infrastructures (FMIs)
According to the paper, “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.”
The paper concludes in the end that risks or negative implications of crypto-currencies are very much limited and or manageable on the basis of existing frameworks.
This ECB report is a boost to crypto-currencies at the moment since it fends off cynics and alarmists who reside in the Euro zone. It does, however, leave questions about the future when crypto does become acceptable to merchants on a mass scale.
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