In a report released by the European Central Bank, the bank has stated that the cryptocurrency has no implications on the real financial system and does not factor into the real-world economy. The report states that crypto assets even dwarfs the volatility of oil and gold, which are considered risk, even in the stock and bonds markets.
The report dubbed as “Crypt-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures,” The European Central Bank discussed the impact digital tokens can have on the real-world economic development. The bank does state that there is a possibility that these digital tokens disrupt the financial system in the future; however, that is only possible if these digital tokens are accepted as a substitute for cash by everyone. While currently, these tokens do not fulfill the said role; they are no of no concern to the current financial system. The report states:
Over the last two years, the historical volatility of crypto-assets dwarfed not only the volatility of the diversified European stock and bond markets but also that of the more volatile oil and gold prices, highlighting the market risk that crypto-asset investors are subject to.
The report also went onto say that cryptocurrency has not really penetrated onto the global scene as of yet and there are very few vendors that accept cryptocurrency as a form of payment. That has mainly been due to the fact that the price of cryptocurrency remains volatile and the volatility refrains a lot of vendors from offering services to customers for bitcoin. The report states:
“At the current stage, crypto-assets do not fulfill the functions of money, and neither do they entail a tangible impact on the real economy nor have significant implications for monetary policy. In principle, implications for monetary policy could materialize in the event that crypto-assets were to turn into a credible substitute for cash and deposits.”
Stablecoins, that drive their value from fiat currencies or by some commodity were also discussed in the paper. The paper states that these stable coins can be an alternative; however, they do need continuous monitoring by the central bank to keep the system in check. The report states that stablecoins have also shown different kinds of volatility due to the individual business model of the company behind them. The report states.
So far, stablecoins seem to be used mostly by crypto-asset traders to hedge against market movements and have demonstrated different levels of price volatility depending on their business models.
Despite the negative comments by the EU and ECB, crypto has been gaining popularity for a while now. Even heavy contenders like Facebook and Amazon have jumped on the crypto bandwagon and have laid out plans to launch their own cryptocurrencies in the future. It is expected that inclusion of cryptocurrency would increase the efficiency of their platform many folds.
What is Next For Cryptos?
The report does not entirely contradict the idea of a digital token controlled by the European Central Bank, for internal use. The report lays out a criterion for how a cryptocurrency being used by a central bank should be structured, and the report states that the tokens should be designed as user-friendly risk-free assets that meet the public demand for the digital age. At the end the report does state that the ECB should be looking into cryptocurrencies, monitoring them for any adverse scenarios, stating:
It is therefore essential that the ECB continues to monitor the crypto-assets phenomenon, raise awareness, and develop preparedness for any adverse scenarios, in cooperation with other relevant authorities.
ECB’s Rocky Relation with Cryptos
The European Union has never been fans of crypto, the European Central Bank has been warning novice investors for a long time not to invest in crypto and is also creating its own crypto regulations to regulate digital tokens and ICOs in EU. Just last month the president of European Central Bank Mario Draghi, attacked bitcoin by calling it an asset and said it is not a currency at all. Draghi’s statement came as a response to a student’s question during an event organized by the European Central Bank (ECB) for the youth.
Bitcoins or anything like that are not currencies, and they are assets. A euro is a euro – today, tomorrow, in a month, it’s always a euro.
In his statement, he also threw his support behind the Euro, saying that he believes in Euro and so should everyone. Draghi also responded to a question about whether bitcoin and other cryptos can disrupt the current financial system:
At this point, they are not significant enough in their entity that they could affect our economies in a macro way.