The cryptocurrency industry requires constant monitoring and oversight says the European Central Bank (ECB). The ECB, however, doesn’t believe that Bitcoin and other virtual currencies currently pose a significant enough threat to the stability of global finance.
Critics say virtual assets could become a likely conduit for criminal activity like money laundering, tax evasion, and other financial crimes and the European Union’s (EU) apex bank agrees with them. The Europol, recently, has taken steps to shut down Bitcoin mixer services. 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. Europe’s top bank believes that the regulations have to keep up with the constantly changing tide of the emerging digital landscape, according to the report. Aside from anti-money laundering (AML) provisions, the 40-page report highlighted the lack of a robust regulatory framework for cryptocurrencies in the EU. Several stakeholders within the EU have consistently called for a regional approach to developing rules and guidelines for virtual assets. No consensus has emerged on how to proceed, so far.
As a consequence of different laws operating in member states one of the biggest concerns is the emergence of regulatory arbitrage within the region. An excerpt from the report on this issue reads that Importantly, EU regulation in this area would prevent diverging approached at the Member State level from proliferating thus leading to fragmentation. With global efforts to stamp out money laundering involving virtual assets, the EU’s AML drive concerning cryptocurrency falls in line. Steps have also been taken to formalize AML provisions for virtual currencies by the Financial Action Task Force (FATF).
The ECB, as part of the report, 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 and organizations like the International Monetary Fund (IMF) say the exact opposite of it.
According to researchers at Europe’s apex bank, FMIs act as a guard against the potential risks associated with virtual assets. As part of the report, the ECB also declared that cryptocurrencies weren’t compatible with the global financial market infrastructure (FMI). The adoption of dovish monetary policies by central banks across the world including the ECB could cause a major push towards cryptocurrencies especially Bitcoin says some investment analysts. 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.
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. Stablecoins, in reality, would cause any form of disintermediation of the current financial structure as they would function mostly as an extension of the present payment model. It isn’t surprising to see that the ECB espousing support for fiat-collateralized cryptocurrencies.
ECB President Draghi way back declared that the bank had no intention of issuing a central bank-backed digital currency (CBDC).