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Recommended 42 PDF Report: European Central Bank: Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures - (ecb.europa.eu)
Abstract

This paper summarises the outcomes of the analysis of the ECB Crypto-Assets Task
Force. First, it proposes a characterisation of crypto-assets in the absence of a
common definition and as a basis for the consistent analysis of this phenomenon.


Second, it analyses recent developments in the crypto-assets market and unfolding
links with financial markets and the economy. Finally, it assesses the potential impact
of crypto-assets on monetary policy, payments and market infrastructures, and
financial stability.

The analysis shows that, in the current market, crypto-assets’ risks
or potential implications are limited and/or manageable on the basis of the existing
regulatory and oversight frameworks.

However, this assessment is subject to change
and should not prevent the ECB from continuing to monitor crypto-assets, raise
awareness and develop preparedness.
Keywords: crypto-assets, characterisation, monitoring, crypto-assets risks

Executive summary


For the purposes of this paper, a crypto-asset is defined as a new type of asset
recorded in digital form and enabled by the use of cryptography that is not and
does not represent a financial claim on, or a liability of, any identifiable entity.


Crypto-assets derive their novelty and specific risk profile, particularly their inherent
high volatility, from the absence of an underlying fundamental value. Crypto-assets are
highly speculative and could expose investors to large losses1
.This paper’s
conclusions are to be interpreted in relation to crypto-assets as defined herein.

The ECB monitors crypto-assets and analyses potential implications for monetary policy and the risks they may entail for the smooth functioning of market infrastructures and payments, as well as for the stability of the financial system. To this end, the ECB established the Internal Crypto-Assets Task Force
(ICA-TF).

The ICA-TF analysis shows that crypto-assets do not currently2 pose an
immediate threat to the financial stability of the euro area.
Their combined value
is small relative to the financial system, and their linkages with the financial sector are
still limited. There are no indications so far that banks in the EU have
systemically-relevant holdings of crypto-assets.

Crypto-assets do not fulfil the functions of money3 and, at the current stage,
neither do they entail a tangible impact on the real economy nor have
significant implications for monetary policy.
The very low number of merchants
that allow the purchase of goods and services with  bitcoins indicates no influence of
the most prominent crypto-asset on price-setting.

In the current regulatory framework, crypto-assets can hardly enter EU financial
market infrastructures (FMIs).
Crypto-assets cannot be used to conduct money
settlements in systemically important FMIs. To the extent that they do not qualify as
securities, central securities depositories (CSDs) cannot undertake settlement of
crypto-assets. Even if crypto-assets-based products were to be cleared by central
counterparties (CCPs), these would need to be authorised and to satisfy existing
regulatory requirements, albeit at additional costs and with no clear benefits to EU
CCPs4


The sector nevertheless requires continuous careful monitoring since
crypto-assets are dynamic and linkages with the wider financial sector may
increase to more significant levels in the future.
Exposures may increase as the
crypto-assets ecosystem (e.g. post-trade services) develops further and more clarity
1 In February 2018, the European Supervisory Authorities (ESAs) for securities (ESMA), banking (EBA),
and insurance and pensions (EIOPA) issued a pan-EU warning to consumers regarding the risks of
buying virtual currencies.
2 As of 31 January 2019 (cut-off date for crypto-assets data used throughout this paper).
3 Mersch, (2018a, 2018b).
4 It is worth noting though that EU clearing members may be exposed to risks  stemming from crypto-assets
futures offered for clearing by third-country recognised CCPs (TC-CCPs).

regarding application of standards may create a more conducive environment for
investments. Depending on how they will be regulated in the future, crypto-assets may
more easily enter the FMI environment, and deteriorate the FMI risk profile

If FMI participants were assessed to pose heightened risks to the FMIs’ safety in
light of their crypto-assets business, FMI operators would have the authority to
impose more stringent restrictions on participation, without prejudice to fair
and open access.
Particularly the Eurosystem could, if need be, require the
segregation of crypto-assets business for participation in TARGET2 and could also
terminate participation on grounds of prudence. CCPs could voluntarily pursue
segregation via separate default funds for crypto-assets clearing services, although
they would still be exposed to loss in own capital at the end of the default “waterfall”5


From a prudential view, crypto-assets should be deducted from CET1 as part of
a conservative prudential treatment.
In fact, the regulation on capital requirements
for credit institutions and investment firms (CRR) is not tailored to crypto-assets in light
of their high volatility. Without prejudice to the ongoing work at the Basel Committee on
Banking Supervision (BCBS), a possible way forward for this conservative prudential
treatment is the Pillar 1 deduction from CET1 similarly to other assets classified as
“intangible assets” under the accounting framework.

Independently of the stipulated prudential treatment, financial institutions
undertaking exposures in crypto-assets are expected to put in place an
appropriate risk management framework commensurate to the risks posed by
the unique characteristics of these activities.
Furthermore, any outstanding risks
not adequately covered under Pillar 1 could be addressed via supervisory action
under a proportional approach.

Disjointed regulatory initiatives at the national level could trigger regulatory
arbitrage and, ultimately, hamper the resilience of the financial system to
crypto-asset market based shocks.
Without prejudice to further work to be
undertaken by the European Parliament, the Council and the Commission, the ICA-TF
analysis suggests that a broader approach to regulation of crypto-assets could be
pursued at the intersection with the financial system, where risks arise from
unregulated so-called “gatekeepers” that provide an entry point for retail investors and
regulated entities. Any regulation should also be balanced to avoid incentivising risky
crypto-assets business.

At present, crypto-assets’ implications for and/or risks to the financial stability
of the euro area, monetary policy, and payments and market infrastructures are
limited or manageable.
This assessment should not be extended to other areas
outside of the scope of this report (e.g. money laundering, consumer protection)
where risks may have already materialised, and should not preclude continuous
monitoring or the analysis of future implications of crypto-assets for the stability and
efficiency of the EU financial systems and FMIs.

Prefunded financial resources used to cover losses caused by participant defaults are commonly referred
to as a “waterfall” and may include the defaulter’s initial margin, the defaulter’s contribution to a
prefunded default arrangement, a specified portion of the CCP’s own funds and other participants’
contributions to a prefunded default arrangement. See CPMI-IOSCO (2017).

Introduction


Crypto-assets have been the subject of intense policy debate. In particular,
crypto-assets have raised concerns with regard to money laundering, market integrity
and consumer protection – among other things – as well as possible implications for
financial stability. Financial sector authorities in Europe and worldwide undertake
various activities on crypto-assets within their mandates. International fora such as the
G7, the G20, the Financial Stability Board (FSB), and standard setting bodies (SSBs)
conduct work on crypto-assets aimed at monitoring crypto-assets’ implications for
global financial stability and coordinating policy responses. The ECB has been
studying this phenomenon since its inception, and published its first report on virtual
currency schemes in 2012, followed by further analysis in 20156....

DOWNLOAD THE COMPLETE 40 PAGE PDF....
https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op223~3ce14e986c.en.pdf

    • 1
    Francisco Gimeno - BC Analyst Europe is setting the pace and marking the path for understanding of cryptocurrencies as crypto assets and how to manage the consequences of this new industry. Anyone interested on this field must read this long but extremely useful pdf. Is this understanding similar or different to the American SEC agency? How are they going to react to this document? What do you think?