The European Central Bank (ECB) has released a new report that presents a “deep dive” into crypto financial risk. It calls for appropriate regulation and oversight of stablecoins as well as decentralized finance (defi). The report also discusses the topic of Bitcoin’s carbon footprint in Europe. It suggests that a ban on proof -of-work mining may be possible.
The latest Macroprudential Bulletin published by European Central Bank (ECB) focuses on crypto-related financial risk, including those associated with stablecoins, defi platforms, and the threat to climate change goals that are attributed to energy-intensive methods for crypto mining. The report was published in July by the European Central Bank (ECB).
The paper examines the policy implications of these segments in the crypto market. Its authors insist that global stablecoin growth and increased use require the immediate implementation of the regulatory, supervisory and oversight frameworks such as the MiCA legislation before the interconnection of digital currencies with the traditional financial system becomes more complex.
The experts at the ECB recognize the importance of stablecoins in crypto ecosystem. They also point out that unbacked crypto assets could pose a threat to financial stability. They comment on May’s collapse algorithmic stablecoin (UST).
Recent developments have shown that stablecoins can be unstable, as demonstrated by the crash in terrausd or the temporary de-pegging tether.
Initially, stablecoins were used primarily as a “relatively secure ‘parking area,’” but the number of use cases for stablecoins has increased in recent years, according to the eurozone’s financial authority notes. This is despite the rapid expansion of defi applications which have been a rapidly growing segment of the crypto market over the past year.
Although defi platforms use technology-enabled innovation, and may differ in some aspects, such as how assets and trust are generated, managed and managed, the ECB insists they don’t create new financial products, but instead mimic traditional financial providers. The central bank also stated that “defi” is in many ways vulnerable to the same risks as traditional finance.
Although Defi platforms or protocols claim to have decentralized governance structures, in reality governance is often more concentrated.
The ECB believes it is necessary to effectively regulate and supervise defi space, despite its anonymity and decentralized nature that makes it more difficult for policymakers and their respective authorities. The European Central Bank calls for an international coordinated approach and common standards in order to fill regulatory gaps.
Probable Ban on Proof-of Work Mining
The ECB’s Macroprudential Bulletin is published as the European Union moves towards the adoption and implementation of the comprehensive MiCA regulatory package. Recent agreements between key EU institutions on the legislation were reached. The draft was rescinded of a controversial proposal that would have prohibited the provision services for cryptocurrency using the power-hungry proofof-work (PoW).
Some members of the crypto community and industry warned that such a move would have led to Bitcoin being banned. The ECB article, asking “Is climate risk price into crypto assets?” argues authorities can incentivize proof-of-stake consensus mechanisms (referred to as the “crypto version of an electric vehicle”) and limit or ban the PoW mechanism, which is referred as the “crypto version of a fossil fuel car”.
While a hands-off approach from public authorities may be possible, it’s highly unlikely. Therefore, authorities should take policy action (e.g. The authors believe disclosure requirements, a carbon tax on crypto transactions and holdings or outright mining bans are possible. According to the authors, it is unlikely that the EU will ban or restrict fossil fuel cars before 2035. However, they believe that crypto assets, with their carbon emissions, are sufficient to offset most countries in the euro zone’s greenhouse gas emission savings.