The European Central Bank on Wednesday called on European politicians to speed up the adoption of legislation that would restrict the cryptocurrency market. Like other international regulators, the ECB is increasingly concerned about the risks to the financial stability of cryptocurrencies. These are still largely unregulated worldwide.
Given the “pace of development” and “increasing risks”, it is important to bring the crypto sector “within the regulated zone and under supervision”, the ECB said in its annual financial stability analysis. According to the central bank, this is an “urgent matter”.
As one of the first international regulators, the EU is working on crypto-trade legislation. A regulation proposed by the European Commission, which, among other things, obliges crypto providers in the EU to obtain a license, is the subject of negotiations between the European Parliament and the Member States. The regulation can only enter into force from 2024, the ECB notes impatiently.
The instability in the crypto world became apparent earlier this month when TerraUSD collapsed, a popular stablecoin. A stablecoin is a coin whose value – in theory – is linked to the real currency, usually the dollar. That link (1 TerraUSD = $ 1) did not work. The security, partly consisting of bitcoin, was insufficient to keep the value equal to that of the dollar. Market confidence evaporated and TerraUSD is now worth only 7.5 cents.
Concern about stack coins
Stablecoins are a growing concern for regulators as they form a bridge to the mainstream financial system. Collapsible stack coins can therefore cause a broader financial stability. Stablecoins are often used for transactions within the cryptocurrency world and between cryptocurrencies and the traditional banking system. The ECB points to the vulnerability of the most widely used stable coin worldwide, tether. Tether is under pressure, in part because of the TerraUSD debacle. Investors pulled $ 10 billion out of the currency this month. Tether’s peg to the dollar will hold for the time being.
The Financial Stability Board (FSB), a major global regulator, recently pointed to the growing entanglement of the cryptocurrency world with banks and asset managers. For example, banks invest in cryptocurrencies or derivative financial products. The risks to financial stability may therefore “escalate rapidly”, according to the FSB, which is currently led by Klaas Knot, chairman of De Nederlandsche Bank.
G7 points to FSB
Politicians and regulators point to each other: G7 finance ministers last weekend called on the FSB to “quickly develop and implement” rules for the crypto sector.
Politicians seem surprised by the explosive growth in the sector. The ECB provides some figures. Despite the recent, significant price losses on cryptocurrencies (bitcoin has lost more than half of its value since November), the market value of all cryptocurrencies is seven times as large as it was in early 2020. In total, it amounts to about 1,000 billion euros. That is less than 1 percent of the global financial system. However, the ECB notes subtly: the size is comparable to the size of the fragmented junk mortgages that led to the global financial crisis of 2007-2008. A subtle way of saying that the next financial crisis could also arise from a cryptocurrency.
Common to the junk mortgages with the crypto world is the lack of transparency. The ECB report states that a “significant proportion” of crypto-trading still takes place outside the eyes of regulators. The information provided by crypto investment providers (and also trading platforms) is “not verifiable”.
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‘Crypto is worth nothing’
ECB President Christine Lagarde told the College Tour television program on Sunday that her “humble opinion” is that cryptocurrencies are “worthless”. “It’s not based on anything, there’s no underlying asset acting as a safety anchor,” she said. During the broadcast, a student recounted how he recently lost thousands of euros on his crypto investment. The Dutch are relatively happy to invest in crypto, according to the ECB report. About one tenth of the households in six euro area countries combined (Germany, France, Italy, Spain, the Netherlands, Belgium) own cryptocurrencies. In the Netherlands, it is almost 15 percent.