Last updated on November 17th, 2022 at 12:29 pm
The latest issue of the Macroprudential Bulletin, published by the European Central Bank (ECB), focuses on financial risks associated with cryptocurrencies, particularly those linked to stablecoins and DeFi platforms, as well as the threat posed to goals for the climate transition by energy-intensive crypto mining techniques. This week, Patrick Hansen, a crypto venture advisor at Presight Capital, highlighted key sections of the study released in July.
The paper’s authors examined the policy implications of these segments of the crypto market. They contended that to prevent further integration of stablecoins with the conventional financial system, the regulatory, supervisory, and oversight frameworks, such as the MiCA legislation, must be implemented immediately, given the global adoption and growth of stablecoins.
In one of the three pieces in the bulletin, the ECB experts note that stablecoins play a crucial role in the cryptocurrency ecosystem and emphasize that if unbacked crypto assets ever pose a threat to financial stability, the financial system may be affected. They made the following remark, recalling the collapse of the algorithmic stablecoin TerraUSD’s (UST) in May:
“Recent developments show that stablecoins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of tether.”
The eurozone’s monetary authority observes that stablecoins have expanded in recent years beyond their initial role as a “reasonably safe” parking place, notably with the advent of DeFi apps, which represent another rapidly growing sector of the crypto market.
Although the ECB acknowledges that DeFi platforms use technology-enabled innovation and differ in some ways, such as how assets are held, trust is generated, and system governance, it maintains that they do not develop new financial products but rather imitate those provided by conventional financial service providers. Furthermore, the central bank believes that DeFi shares many of the same vulnerabilities as traditional finance.
Despite the difficulties caused by the decentralized and anonymous structure of the DeFi space, which makes the task more challenging for policymakers and the relevant authorities, the ECB believes that measures are required to adequately regulate and monitor the DeFi space. The European Central Bank advocates a coordinated international strategy and common standards to find and close regulatory loopholes.
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