No threat to financial stability by cryptocurrencies

A paper from European Central Bank was published on Friday. In the paper they mentioned about the limitation of ‘’linkages’’ of crypto to financial sector indeed. They also said that there is only fewer relevancies of combined crypto-assets to financial system. That does mean banks inside EU do not seem to have relevant holdings of crypto-assets. Cryptocurrency also doesn’t have the ability to be used instead of money. In the entire world only a few number of people use bitcoin to buy goods and services. So over the real economy there is no impact of crypto indeed.

There are some barriers for crypto for being used as instead of money according to central bank . The barriers are as follows:

-low acceptance among merchants,

-high price volatility,

-devoid of the backing of central bank,

-can’t match with the characteristics of a monetary asset,

On the off chance cryptos were collateralized by central banks reserves then it is expected that it would be less volatile. Hopefully it would also increase the demand for central bank reserves. Then hopefully it would be used instead of monetary policy and its implementation. The ECB is not in the favor of central bank for opening its own digital currency but open to exploration. The concept of the central bank is that it says a CBDC could be developed that meets the public demand for an economy is safe where the CBDC would be used as user-friendly risk-free asset. Crypto-asset can hardly enter EU financial market infrastructure under the current regulatory regime.

According to the published paper some statements are as follows:

-With a view to conducting money settlements in systemically important FMIs, crypto-asset can’t be used.

-They are not qualified as securities, central securities depositories (CSDs),

-To satisfy existing regulatory requirements these need to be authorized even if crypto-asset based products were to be cleared by central counterparties (CCPs).

Above all it can be said that the potential implications of the technology are limited as per existing regulatory and oversight frameworks. All the concepts are of ECB which is echoed here.

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