Expansion of Cryptocurrency Usage in EU Sparks Stability Worries at Central Bank
The European Central Bank (ECB) has released a report highlighting the potential financial stability risks associated with cryptocurrencies, particularly stablecoins, and the growing interconnectedness between traditional financial institutions and the crypto market.
The ECB's concerns revolve around the potential for financial stability shocks from stablecoin collapses, the undermining of monetary sovereignty due to reliance on foreign-currency stablecoins, and the risk to traditional banking caused by deposit diversion if stablecoins offer interest. The anonymity of some stablecoins also raises concerns about illicit transactions.
Regarding non-bank financial institutions, the ECB's concerns stem from the risks of regulatory divergence and financial fragmentation posed by these institutions, which may amplify risks due to less stringent oversight compared to banks. The ECB is focusing on creating harmonized regulatory frameworks in the EU, such as MiCA, and developing prudential standards for crypto-asset exposures.
The ECB is also designing the digital euro to minimize risks to financial stability. For instance, measures are being put in place to limit individual holdings and prevent large deposit outflows from banks.
The ECB's report reveals that bank cryptocurrency custody grew from €400 million in 2023 to €4.7 billion in 2024. However, the report does not discuss the potential implications of the discrepancy between its custody figures and those of the Basel Committee.
The ECB's survey, conducted in November 2024, found that 9.7% of households owned some crypto-assets. The survey also indicates potential for significant growth in cryptocurrency investment, with around 7% of Italian households having invested in cryptocurrencies, compared to 19% in some other regions.
The ECB extrapolated total crypto holdings to be €75 billion, which is approximately 3% of the total market capitalization for cryptocurrencies. Of those already holding crypto, around 56% planned to invest more, and 10% of households that have not yet invested intend to buy some.
The ECB registered €1.2 billion of deposits from crypto firms in 2024, which is less than half of the peak amount in 2021. The ECB's report does not provide a clear explanation for the discrepancy between its custody figures and those of the Basel Committee.
The ECB's findings imply potential growth in the interconnectedness between traditional financial institutions and the cryptocurrency markets. The ECB considers the growth in volume of crypto-asset investment products as an avenue for greater interconnectedness.
The ECB's report does not provide evidence to support the implied decline in custody in the UK and Switzerland, according to Basel Committee figures. The majority of households (54%) reported holding under €1,000 in cryptocurrencies, and 91% said they invested less than €20,000.
In conclusion, the ECB's report underscores the need for careful regulation and oversight of cryptocurrencies and non-bank financial institutions to manage potential risks and maintain financial stability. The ECB's design of the digital euro also aims to minimize risks to financial stability.
- The ECB's concerns about bank involvement in cryptocurrencies extend to the potential risks associated with bank cryptocurrency custody, as demonstrated by the growth from €400 million in 2023 to €4.7 billion in 2024.
- The ECB is focusing on creating harmonized regulatory frameworks, such as MiCA, to prevent regulatory divergence and financial fragmentation posed by non-bank financial institutions in the crypto market.
- Despite the relatively low individual holdings, with 54% of households reporting holding under €1,000 in cryptocurrencies, the ECB's survey indicates potential significant growth in cryptocurrency investment, particularly in some regions where as much as 19% of households have invested.
- The ECB's design of the digital euro includes measures to limit individual holdings and prevent large deposit outflows from conventional banks, aimed at maintaining the stability of the traditional banking sector in the era of increased interconnectedness with the crypto market.
