ECB: “new crypto law urgently needed”

The ECB has compiled three reports calling on Europe to regulate the crypto market.

Crypto and the ECB: the need for a new law

The fact that the European Central Bank (ECB) does not see eye to eye with cryptocurrencies is now common knowledge. 

On several occasions, members of the governing board, most notably President Lagarde, have warned of the risks that cryptocurrencies could pose to the financial stability of markets. 

These concerns have evidently increased exponentially since the collapse of the Terra-Luna ecosystem last May and not only that.

A recent report published by the Frankfurt Institute’s expert analysts states:

“Recent developments show that stablecoins are far from stable, as exemplified by the collapse of Terra USD and the temporary de-pegging of Tether”.

And that’s why the European Central Bank has long been urging both the European Commission and individual states to have stricter laws to regulate cryptocurrency markets, so that events like what happened with Terra won’t happen again.

And to push governments to act, they has compiled three reports to clarify what the risks of deregulating the digital currency market may be.

The issue on which the ECB is focusing its attention would also concern the need for some sort of harmonization between the laws of European countries after the approval of the new MiCA regulation. 

According to reports in a Financial Times article, regulators from 19 EU member states will attend a meeting of the supervisory board in July to discuss precisely MiCA and its possible implementation, which is expected to take place in 2024.

The ECB is trying to stir the pot, pending the entry into force of this new law, for states to have their own laws to control and regulate the cryptocurrency sector.  

The ECB’s report for the urgent request

In its report, the ECB emphasizes above all the risk that the exponential growth of stablecoins could have on the stability of traditional financial markets. 

The central bank report notes that:

“Recent developments show that stablecoins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of Tether”.

Stablecoins and DeFi seem to be the big concern of financial authorities, not only in Europe but also in the United States and the United Kingdom.

In this regard, the ECB has also prepared a specific report on DeFi, which states:

“As vulnerabilities start to build, an internationally coordinated approach is needed to mitigate DeFi risks before they pose a risk to financial stability. To date, interlinkages with the traditional financial sector have been limited, but they have the potential to grow rapidly given institutional interest”.

Finally, the third report highlights the environmental risks associated with mining, which continues to be a concern due to its excessive energy consumption, especially by Bitcoin and Ethereum, the two main cryptocurrencies.