ECB Calls for Urgent Regulation of Stablecoins and Defi, Possible Mining Ban
The European Central Bank (ECB), has presented a new report "deep dive into crypto financial risks," which calls for "appropriate" regulation and oversight of
stablecoins and decentralized finance (defi). It also addresses the subject of bitcoin’s carbon footprint in Europe, suggesting a probable ban on
proof-of-work mining.
The latest
edition of the Macroprudential Bulletin, issued by the European Central Bank
(ECB), focuses on the financial risks associated with stablecoins and defi
platforms, as well as the threat to climate transition goals blamed on
energy-intensive methods of crypto mining. Key moments in the report published in
July were highlighted this week by Patrick Hansen, the Crypto Venture
Advisor at Presight Capital.
The authors
of the paper insist that the growth and increasing use of stablecoins around
the world require immediate implementation of the necessary regulatory,
supervisory, and oversight frameworks, such as the MiCA legislation
before the interconnection between these digital currencies and the traditional
financial system deepens further.
Recognizing
the important role of stablecoins for the crypto ecosystem in one of the three
articles in the bulletin, the ECB experts point out that their critical
function could have contagion effects on the financial system if unbacked
crypto-assets pose a risk to financial stability in the future. Reminding of
May’s collapse of the terrausd (UST) algorithmic stablecoin, they
comment:
"Recent
developments show that stablecoins are anything but stable, as exemplified by
the crash of the terrausd and the temporary de-pegging of the tether."
While
acknowledging that Defi platforms employ technology-enabled innovation and
differ in certain aspects such as how assets are held, trust is generated, and
systems are governed, the ECB claims they do not create novel financial
products but rather mimic those offered by traditional financial providers. At
the same time, "defi is in many ways subject to the same vulnerabilities
as traditional finance," the Central Bank said. It added:
"Defi
protocols or platforms claim to have a decentralized governance structure,
although in reality governance is often concentrated."
The ECB
believes that efforts are needed to regulate and supervise the defi space
effectively, despite the challenges that stem from its decentralized and
anonymous nature, which make the task harder for policymakers and respective
authorities. The European Central Bank urges a coordinated approach at the
international level and common standards to identify and fill the regulatory
gaps.
Ban on Proof-of-Work Mining Possible
The European Union is on the way to adopting and implementing the comprehensive MiCA regulatory package. Key EU
institutions recently reached an agreement on the legislation.
A controversial proposal to prohibit the provision of services for
cryptocurrencies using power-hungry proof-of-work (PoW) mining was dropped from
the draft.
Members of
the crypto industry and community had warned that such a measure would have
amounted to a ban on bitcoin. But the ECB article questioned, "Is
climate risk priced into crypto assets?" argues that authorities can
incentivize the proof-of-stake (PoS) consensus mechanisms, described as
"the crypto version of the electric vehicle," and restrict or ban the
PoW mechanisms, referred to as "the crypto version of the fossil fuel
car."
0 Comments