The paper discusses supervision and regulatory issues of cryptocurrencies, and finds that a central bank digital currency in the EU is not (yet) warranted.
In May, the European Central Bank’s Crypto-Assets Task Force published a paper on cryptocurrencies such as Bitcoin, Ether, and Ripple (referred to as narrowly defined “crypto-assets”). The paper, titled “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures,” follows similar recent publications by the European Banking Authority (EBA)[i] and the European Securities and Markets Authority (ESMA).[ii]
After examining cryptocurrency markets and tracing their linkage to the financial system and the real economy, the authors of the paper found that cryptocurrencies currently do not pose a material risk to financial stability. Further, the authors currently see no direct implications of cryptocurrencies for monetary policy.
Against this background, the paper discusses questions of supervision and prudential treatment and future regulation of cryptocurrencies.
Supervision and Prudential Treatment
The paper offers the following assessments on the prudential treatment of cryptocurrencies:
- “From a prudential view, crypto-assets should be deducted from CET1 as part of a conservative prudential treatment… Without prejudice to the ongoing work at the Basel Committee on Banking Supervision (BCBS), a possible way forward for this conservative prudential treatment is the Pillar 1 deduction from CET1 similarly to other assets classified as “intangible assets” under the accounting framework.”
- “Regardless of the type of exposure and prudential treatment, a specific risk management framework would be required to cover the specific risks entailed in crypto-asset activities.”
- “With regard to liquidity requirements, crypto-assets are not included in the list of eligible instruments for the liquidity coverage ratio (LCR) liquidity buffer.”
- “Crypto-assets are most likely to be subject to a 100% stable funding requirement.”
As the paper notes, cryptocurrencies are currently not subject to the relevant EU legal acts. With a view to future regulation, the authors warn that uncoordinated regulation at the country level could create incentives for regulatory arbitrage and ultimately adversely affect the resilience of the financial system to cryptocurrency market-based shocks. Regulatory intervention would be complicated by the lack of governance and distributed architecture of cryptocurrencies. According to the paper:
- Regulation on an EU-level should address cryptocurrency “gatekeeping” services (i.e., custody and trading/exchange services at the intersection with the regulated financial system).
- However, such regulation may not be suited for decentralized gatekeeping activities without an identifiable intermediary (e.g., decentralized trading platforms). Such decentralized services should therefore be subject to a minimum set of principles regarding technological integrity, algorithm performance, and transparency as well as stress-tested operational security, among other principles.
No Central Bank Digital Currency in the EU (Yet)
The paper explores the possibility of introducing a central bank digital currency (CBDC) for use by the general public and weighs the benefits and costs of a CBDC (such as providing a user-friendly, risk-free asset that is both digitalized and safe vs. potentially less privacy, an increased risk of money laundering, and an unclear interaction with monetary policy transmission mechanisms). Ultimately, the authors argue, a CBDC is currently not warranted, given the existing electronic payment instruments and the relatively new possibility of instant payments. However, this outlook may change in the future, driven by the changing needs of EU citizens or by another central bank issuing a CBDC that is available cross-border. In any event, the European Central Bank community is still conducting research into the functional and technical feasibility of implementing a CBDC.