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European Central Bank says crypto does not pose threat to financial stability

Benson Toti

The European Central Bank (ECB) does not see cryptocurrencies as posing a threat to the financial stability of the Eurozone, at least in their current state, industry website Coindesk has reported.

In a new paper, the regulator cited the small size of the cryptocurrency market relative to the financial system, as one of the reasons why it believes that digital currencies do not pose a threat to the sector, currently.

“Even at their peak in early 2018 the outstanding value of crypto-assets was too small to give rise to concerns for the EU financial system and the economy,” the ECB wrote.

The central bank also noted that the crypto industry’s links to the financial sector were currently limited, although it did point out that current developments, “such as futures contracts linked to bitcoin prices and financial investment vehicles tracking crypto-assets, may increase links to the traditional financial sector and the real economy”. For the time being, however, the crypto world’s connection to the financial sector is not strong enough to raise concerns over the financial stability of the region.

The paper also argues that, at the current stage, “crypto-assets do not fulfil the functions of money, and neither do they entail a tangible impact on the real economy nor have significant implications for monetary policy”.

“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 fulfil the characteristics of a monetary asset in the near future.”

On the subject of stablecoins, the ECB said that it remained to be seen whether “algorithmic stablecoins” could lower price volatility when it comes to crypto assets. The regulator said that stablecoins could become less volatile if the coins were collateralised by central bank reserves, for example, but it also clarified that such collateralised were not crypto assets, as defined by the paper.

While the ECB concluded that current crypto risks are “limited and/or manageable within the current framework”, it indicated that it would continue to monitor the crypto sector to prepare for “any adverse scenarios”.

Featured image: kavalenkava / Shutterstock.com

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