A new report from the European Central Bank (ECB), presented as a “deep dive into crypto financial risks,” calls for “adequate” regulation and oversight of stablecoin and decentralized finance (defi). It also covers the hot topic of Bitcoin’s carbon footprint in Europe, suggesting a possible ban on proof-of-work mining.
Stablecoin Growth, Defi Assures Regulation and Oversight, ECB Says
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Crypto-related financial risks, especially those associated with stablecoin and Defi’s platform, and energy-intensive crypto mining The threats posed to climate change targets by energy-intensive crypto mining practices are the focus of the latestedition of the European Central Bank’s (ECB) Macroprudential Bulletin, published in July, and highlighted this week by Presight Capital’s crypto venture advisor, Patrick Hansen, Crypto Venture Advisor at Presight Capital, this weekhighlighted
The authors of the paper, which explores the policy implications of these segments of the crypto market, argue that the growth and increased use of stablecoins around the world will require immediate implementation of necessary regulatory, oversight, and monitoring frameworks, such as the MiCA Act, before the interconnection between these digital currencies and traditional financial systems can further deepen We argue that there is a need to.
Recognizing the important role of stablecoins for the crypto ecosystem in one of the Bulletin’s three articles, the ECB expert Pointing out, recalling the collapse of the Terrauded (UST) algorithmic stablecoin in May, they commented.
Recent developments, exemplified by the crash of Terausd and the temporary de-pegging of Tether, show that stable coins are anything but stable.
Initially functioning primarily as a “relatively safe ‘parking lot,'” Eurozone monetary authorities note that in recent years, examples of stablecoin use have increased, especially with the rise of defi applications, which represent another rapidly expanding segment of the crypto market over the past year Eurozone monetary authorities have noted.
While acknowledging that defi platforms employ technology-enabled innovation and differ in certain aspects, such as how assets are held, credit is generated, and systems are managed, the ECB insists that rather than creating new financial products, they mimic those offered by traditional financial providers It argues that it will do so. At the same time, the central bank elaborates, “Defi is in many respects subject to the same vulnerabilities as traditional finance.”
Defi protocols and platforms claim to have decentralized governance structures, when in fact governance is often centralized.
The ECB believes that efforts are needed to effectively regulate and supervise the defi space, despite the challenges posed by its decentralized and anonymous nature that make the task difficult for policymakers and individual authorities. The European Central Bank urges a coordinated approach at the international level and common standards to identify and fill regulatory gaps.
Proof-of-Work Mining Ban Seen as Likely
ECB Macroprudential Bulletin as EU Moves Forward to Adopt and Implement Comprehensive MiCA Regulatory Package The announcement comes as the EU’s main institutions recently reached agreement on the legislation. A controversial proposal to ban the provision of cryptocurrency services that use power-hungry proof-of-work (PoW) mining has been removed from the draft.
Crypto industry and community members had warned that such a measure would amount to a ban on Bitcoin. However, the ECB article, which asked the question, “Are climate risks factored into crypto assets?”, argued that authorities should encourage proof-of-stake (PoS) agreement mechanisms, “the crypto version of electric vehicles,” and restrict or ban PoW mechanisms, “the crypto version of fossil fuel vehicles.” He argues that it can.
“In short, the authors believe that a hands-off approach by public authorities is possible, but highly unlikely, and that policy measures by authorities (such as disclosure requirements, carbon taxes on crypto transactions and holdings, and a total ban on mining) are probable.” It is also unlikely, in their opinion, that the EU will restrict or ban fossil fuel vehicles by 2035 while not taking action against crypto assets with sufficient carbon emissions to negate greenhouse gas emission reductions in most Eurozone countries.
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