The European Central Bank (ECB) says the cryptocurrency industry requires constant monitoring and oversight. However, the ECB doesn’t believe that Bitcoin and other virtual currencies currently pose a significant enough threat to the stability of global finance.
The European Union’s (EU) apex bank agrees with critics who say virtual assets could become a likely conduit for criminal activity like money laundering, tax evasion, and other financial crimes. Recently, the Europol has taken steps to shut down Bitcoin mixer services.
Dynamic Cryptocurrency Landscape Needs Continuous Regulation
In its report titled “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures,” the ECB called for watchful observance of the cryptocurrency industry. According to the report, Europe’s top bank believes that the regulations have to keep up with the constantly changing tide of the emerging digital landscape.
The 40-page report highlighted the lack of a robust regulatory framework for cryptocurrencies in the EU, aside from anti-money laundering (AML) provisions. Several stakeholders within the EU have consistently called for a regional approach to developing rules and guidelines for virtual assets. So far, no consensus has emerged on how to proceed.
One of the biggest concerns is the emergence of regulatory arbitrage within the region as a consequence of different laws operating in member states. An excerpt from the report on this issue reads:
“Importantly, EU regulation in this area would prevent diverging approached at the Member State level from proliferating thus leading to fragmentation.”
The EU’s AML drive concerning cryptocurrency falls in line with global efforts to stamp out money laundering involving virtual assets. The Financial Action Task Force (FATF) has also taken steps to formalize AML provisions for virtual currencies.
Virtual Assets Not a Threat to Mainstream Finance
As part of the report, the ECB also declared that cryptocurrencies do not currently pose any threat to the stability of global mainstream finance. According to the report:
“Their combined value is small relative to the financial system. The sector nevertheless requires continuous careful monitoring, as market developments are dynamic and linkages to the wider financial sector may increase to more significant levels in the future.”
The ECB and the EU have consistently dismissed the perceived disruptive nature of the emerging digital landscape. Meanwhile, organizations like the International Monetary Fund (IMF) say the exact opposite.
As part of the report, the ECB also declared that cryptocurrencies weren’t compatible with the global financial market infrastructure (FMI). According to researchers at Europe’s apex bank, FMIs act as a guard against the potential risks associated with virtual assets.
Some investment analysts say that the adoption of dovish monetary policies by central banks across the world including the ECB could cause a major push towards cryptocurrencies especially Bitcoin.
Critics of the move towards reduced interest rates and quantitative easing believe that an imminent market crash is on the cards. Across the world, the Federal Reserve in the United States, central banks of New Zealand, Japan, and Australia to mention a few have adopted dovish fiscal policies.
ECB Prefers Stablecoins
Earlier in May 2019, Francois Villeroy de Galhau, an ECB policymaker declared that the bank saw greater potential in stablecoins than Bitcoin. Villeroy, who many touts as being next-in-line to succeed current ECB President Mario Draghi opined that fiat-pegged cryptos would appeal more to stakeholders in mainstream finance.
In reality, stablecoins would cause any form of disintermediation of the current financial structure as they would function mostly as an extension of the present payment model. Thus, it isn’t surprising to see the ECB espousing support for fiat-collateralized cryptocurrencies.
Back in 2018, ECB President Draghi declared that the bank had no intention of issuing a central bank-backed digital currency (CBDC).