ECB worried about cryptocurrencies: a danger to traditional finance

Elizabeth Smith

Many banks have begun to enter the Web3, also offering some customers cryptocurrencies as speculative assets. But the risk is still too high. So the ECB tries to shed light on the risks, trying to mitigate them.

Incredible growth, excessive volatility and financial innovation: these are the preponderant factors that accompany cryptocurrencies.

Currently all this continues to attract millions of investors from all over the world. With a growing involvement of institutional bodies, it proves to be the gateway even to the less experienced in the sector.

This sheds light on how important it is to gain a better understanding of the potential risks cryptocurrencies could pose to financial stability, provided the trends continue on this trajectory.

The risk of severe financial crises increases in line with the degree of connection between the digital assets of the Web3 and the traditional financial sector, the use of leverage and lending activity.

The ECB is no longer willing to let it go: a solution common to all of Europe is urgently needed. It is important to fill regulatory and data gaps in the crypto ecosystem to mitigate such systemic risks.

Cryptocurrencies at the center of the political debate

We all know how international companies are increasingly targeting the digital currency sector to broaden their horizons. But the situation risks getting out of control.

Countries around the world are working to frame cryptocurrencies in the best way.

They are currently the subject of intense political debate. But not only them, the different sectors of the Web3 are under constant analysis. Between Bitcoin, Defi, NFT and Stablecoin the list is long.

The frequent use of digital currencies as a tool for speculation, their high volatility and their energy consumption is a matter of concern.

This also raises concerns about money laundering, market integrity and consumer protection.

Investors immersed in crypto despite the risks: why?

Despite the risks, investor demand for cryptocurrencies is constantly increasing.

This is due to the perceived opportunities for quick earnings and the perceived benefits of institutional investors with respect to portfolio diversification.

Furthermore, many providers in the payment sector have also enhanced their services based on virtual currencies. This, allowing access even to citizens who are less experienced in finance.

The crypto market represents (by size) only 1% of all international finance. But, despite this and the declines of 2022, it seems to have enough strength to attract anyone, managing to condition even those less close to the sector who risk big if they play with such risky assets.

ECB warns: rules too different in the European countries

Several institutional bodies are evaluating the integration of cryptocurrencies. But the ECB is afraid that this could lead to many problems for European citizens.

First of all, the rules are often vague and do not yet allow the whole sector to be properly framed. But, considering that this could only take a little longer, the problem of regulatory divergence in Europe remains.

While the market is slowly resuming its recovery, it is unthinkable that the European allies do not have at least common guidelines for operating with cryptocurrencies.

This could cause divergences that in the long run could turn into financial crises. The ECB does not want to face this, especially now that the organization even risks recession.

Lagarde worried about the real value of cryptocurrencies

From this point of view, it is the president of the ECB who exposes herself with humility, urging all allies to take rapid and synergistic measures.

Christine Lagarde admits that private cryptocurrencies (such as Bitcoin or Dogecoin to be clear) cannot be converted into public money at any time and raise multiple problems of a public and financial nature, they are a danger for investors, especially the less experienced.

Furthermore, the president reiterates that they are purely speculative assets, their real value is highly questionable considering that they do not rest on a real, tangible underlying that acts as a lifeline.

The concern for the citizens is reflected in Lagarde’s words.

New proposals from the ECB

At the moment, some new rules common to all of Europe are being considered within the European Parliament, with proposals to be carefully examined before they are implemented as laws.

One of the parliamentarians, Ville Niinisto, proposed to introduce, for example, capital requirements at the base of a blockchain, or to limit the possession of Bitcoin or other crypto by banks to 1% of the basic capital, the so-called “Level 1”.

However, the concern of the ECB is still high, which finds itself in a complex picture of events that, between inflation, the danger of recession and cryptocurrencies, still seems to have a lot to do.

Read also: Crisis of Credit Suisse and Deutsche Bank: what happens to cryptocurrencies if banks fail?

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