The European Central Bank (ECB) has warned in a report that the crypto industry’s deepening ties to banks and asset managers can be a risk to financial stability.
The ECB published the report on Tuesday and said that it had done “a deep dive into crypto asset leverage and crypto lending” and gained evidence that these activities were becoming riskier, complex and associated with traditional institutions.
“Investors have been able to handle the €1.3 trillion fall in the market capitalisation of unbacked crypto assets since November 2021 without any financial stability risks being incurred. However, at this rate, a point will be reached where unbacked crypto assets represent a risk to financial stability,” the report said.
Bitcoin fell below $30,000 for the first time since last summer and this concerns the ECB. The market’s most crucial stablecoin, Tether, also lost its peg to the US dollar for a short period. Also, the rival of Tether, TerraUSD got completely destroyed.
The President of ECB, Christine Lagarde, stated that a crypto token was “worth nothing, it is based on nothing, there is no underlying asset to act as an anchor of safety.”
An ECB executive, Fabio Panetta, not long ago compared the sector to a “Ponzi scheme” and asked for a regulatory restraint in order to avoid a “lawless frenzy of risk-taking”.
As per Lagarde, the central bank has been working on a digital euro. It is aiming to build a prototype for test purposes by next year prior to deciding whether to launch it three years later. Lagarde also said that its own CBDC is going to be “vastly different to many of those things.”
Furthermore, the ECB has also mentioned risks from decentralised finance (DeFi) in which cryptocurrency-based software programs provide financial services without using any intermediaries like banks.
The ECB is firm in its decision to promote CBDC even though the general public is not supportive of that decision. Recently, the ECB said that anonymity in CBDC might get outshined by private coins.
The European Union is finalising a legislation, dubbed markets in crypto assets, but the ECB said that it is not going to come into force till 2024 at least.
“Given the speed of crypto developments and the increasing risks, it is important to bring crypto-assets into the regulatory perimeter and under supervision as a matter of urgency,” ECB said.