The ECB has released a new paper on “crypto assets”
The European Central Bank released a paper this month titled “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures.” We wanted to take a few minutes to outline some of the paper’s most significant conclusions, and give our own opinion on what the digital asset industry needs from regulators like the ECB.
Firstly, the analysis by the ECB’s Crypto-Asset Task Force concludes that crypto assets are manageable under the existing regulatory framework — a striking position to take, considering the prevailing view among industry players tends to be that there’s a real need to new regulation. Of course, the paper states that this assessment could change in the future as the cryptocurrency market continues to evolve and develop.
The paper states that crypto assets have no intrinsic value, and do not fall into any one of the conventional characterization categories. They are a new asset class different from securities, as they do not feature any kind of financial responsibility; they are not electronic money as they do not represent a claim on the issuer nor are they scriptural money in the form of deposits or central bank money. They are not a derivative or a currency. Hence, they do not follow existing payment services regulation. The paper states that the value of crypto assets comes from the fact that they are valuable in the eyes’ of their holders. (It’s important to note that “crypto asset” in this case excludes security tokens and asset-backed tokens). The paper stresses that crypto assets can’t pose a risk to the monetary policy as they do not qualify as money, and therefore do not compete with cash or deposits. Crypto assets, as stated in the paper, are more of an investment than money. The ECB recognizes that crypto assets can pose a risk when it comes to money laundering, terrorism financing and consumer protection, but it also recognizes that Distributed Ledger Technology has potential benefits for the financial system.
While the exposure of financial institutions in Europe to crypto assets is too low to pose a serious risk to financial stability for the time being, the Bank acknowledges that this could be a problem later on, as access to financial products related to crypto assets increases. The paper states that institutional exposure to crypto assets would likely increase if the accounting treatment was clarified. One possible solution is to classify cryptocurrencies as intangible assets; this way, the authorities would be able to capture the volatility of crypt assets. Regardless of how they end up being classified, the ECB wants crypto assets to be subject to a 100% stable funding requirement.
Although crypto assets don’t fall under the purview of European laws such as EMD2, PSD2, and MiFID, the ECB believes that like these assets space can be successfully managed without additional laws or regulations. However, the ECB believes that some companies dealing in this space such as digital assets custodians or cryptocurrency exchanges should be regulated at the EU level, which would require new regulatory frameworks and solutions to be developed. The paper states that the Bank does not see the value proposition of cryptocurrencies and wouldn’t want to encourage their use.
When it comes to the possibility of ECB issuing a crypto euro, the Central Bank claims that the risks largely outweigh the benefits, and that a crypto-euro would be more beneficial from a technological than from a monetary standpoint. If it was ever issued, it wouldn’t be classified as a crypto asset, but as just another form of euro which would be equal to the paper euro banknote. Nevertheless, the ECB says that the demand for a crypto-euro is not high enough for the Bank to start seriously considering issuing such a token for the time being. They will be monitoring the space and, should there be significant demand, might reconsider issuing the euro on a blockchain later on.
At STASIS, we respect the ECB’s desire to examine the applicability of existing regulation for digital assets, before rushing into new regulation. However, it’s our opinion that the considerable amount of uncertainty about how regulators will respond to various digital-asset related issues makes it clear that the current regulatory situation is unsustainable. At the very least, companies need clarification from regulators about the specifics of how existing regulation will be applied to their businesses. We encourage regulators to go even further, and develop new asset clarifications that account for the unique properties of blockchain-based assets. Malta’s pioneering Virtual Financial Asset (VFA) classification can be taken as an example.
While Europe still has a ways to go in terms of creating regulatory clarity around digital assets, we’re encouraged by the ECB’s willingness to take a close look at these questions, and are optimistic about the progress being made, on both the national and European Union levels.
