ECB calls for regulation of stablecoins and Defi, including prohibition of proof-of-work mining

A new report from the European Central Bank (ECB), presented as a “deep dive into the financial risks of cryptocurrencies“, calls for regulation and monitoring “most likely» stable currencies and decentralized finance (defi). She also brings up the hot topic of bitcoin’s carbon footprint in Europe, suggesting that a ban on proof-of-work mining is likely.

The growth of stablecoins and decentralized finance warrant regulation and supervision, ECB says.

The financial risks of cryptocurrencies, those associated with stablecoins and the challenge in particular, as well as the threat to climate transition goals attributed to energy-intensive cryptocurrency mining methods, are at the center of the latest edition of the Macroprudential Bulletin published by the European Central Bank (ECB). Key moments from the July report were highlighted this week by Patrick Hansen, crypto venture advisor at Presight Capital.

Exploring the policy implications of these segments of the crypto market, the authors of the paper insist that the growth and increasing use of stablecoins around the world calls for the immediate implementation of the necessary regulatory, supervisory and control frameworks. , such as the MiCA legislation, before the interconnection between these digital currencies and the traditional financial system deepens further.

Acknowledging the important role of stablecoins for the crypto ecosystem in one of the newsletter’s three articles, ECB experts point out that their critical function could have contagion effects for the financial system, if unbacked crypto-assets could a risk to financial stability in the future. Recalling last May’s collapse of the algorithmic stablecoin terrausd (UST), his comment:

Recent developments show that stablecoins are anything but stable, as illustrated by the crash of terrausd and the temporary de-pegging of tether.

Use cases for stablecoins have proliferated in recent years, note the Eurozone Monetary Authority, especially with the rise of set applications, which represent another fast-growing segment of the cryptocurrency market, since a year.

While acknowledging that the platforms define the call for technological innovation and differ on certain aspects such as how assets are held, the trust generated and the systems governed, the ECB says they do not create new products but rather mimic those offered by traditional financial providers. At the same time, “the challenge is in many ways subject to the same vulnerabilities as traditional finance“, specifies the central bank:

Protocols or platforms claim to have a decentralized governance structure, when in reality the governance is often concentrated.

The ECB believes that efforts are needed to effectively regulate and supervise the defined space, despite the challenges that require its decentralized and anonymous nature, which become the more difficult task for policy makers and respective authorities. The European Central Bank advocates an internationally coordinated approach and common standards to identify and close regulatory gaps.

Proof-of-work mining ban deemed likely

The ECB’s macroprudential bulletin comes as the European Union moves towards adopting and implementing the comprehensive MiCA regulatory package. Key EU institutions recently reached agreement on the legislation. A controversial proposal to ban the provision of services for cryptocurrencies using energy-intensive proof-of-work (PoW) mining has been dropped in the draft.

Members of the cryptocurrency industry and community had warned that such a move would have amounted to a bitcoin ban. But the ECB article, which poses the question “Is climate risk taken into account in crypto assets?“, argues that authorities can encourage Proof-of-Stake (PoS) consensus mechanisms, described as “the cryptographic version of the electric vehicle“, and prevent or prohibit PoW mechanisms, called “the crypto version of the fossil fuel car“.

Thus, while a hands-off approach by government is possible, it is highly unlikely, and political action by authorities (e.g., disclosure requirements, a carbon tax on crypto transactions or holdings, or an outright ban simple mining) is probablethink the authors. According to them, the EU is also unlikely to limit or ban fossil fuel cars by 2035, but not take action against crypto-assets with their carbon emissions which they say are enough to cancel the greenhouse gas emissions savings of most euro area countries.

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