ECB Issues Three Reports in Effort To Pass Biggest Crypto Law in Europe

The European Central Bank is urging countries to act quickly on regulating the digital asset space as the industry poses increasing threats to financial stability.

In three reports published Monday, the ECB called on policymakers and member states to pass the Markets in Crypto-Assets (MiCA) law, Europe’s first attempt at comprehensive policy around cryptocurrencies, ironed out in late June. The law needs “to be implemented urgently,” the EU said in its report on stablecoins.

MiCA will require stablecoin issuers to maintain ample reserves and regularly update disclosure documents. The new law would also address environmental concerns around crypto by having firms report their energy usage and emissions. 

Stablecoins specifically threaten financial stability because of their contagion risks. These types of digital assets, which either rely on reserves or algorithms to maintain value, have become an increasingly important part of the crypto industry, the ECB said. 

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

TerraUSD (UST) was an experimental seigniorage system which suffered a failure of its algorithmic stability mechanism. It was fundamentally different from centralized stablecoins such as USDC which is backed by US dollars and short term Treasurys. It also differs from decentralized stablecoins such as DAI, which is overcollateralized — meaning that users borrowing against their crypto can borrow less DAI than the value of their locked collateral.

Lawmakers in the US have also expressed concern about the legitimacy and stability of stablecoins in the aftermath of UST’s depegging. 

Treasury Secretary Janet Yellen and a number of prominent politicians on the federal level have urged regulators to treat stablecoins and similar digital assets like banks — which industry participants have decried. 

“We’ve just had over this last week with Terra and with Tether an illustration of the risks associated with stablecoins…there can be runs,” Yellen said during a May congressional hearing. 

Similar to the US, ECB officials encourage policymakers to take an international approach to digital asset regulation, especially as the technology continues to transcend borders. 

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

Earlier this month, in the first of many expected digital asset reports following President Biden’s executive order, a group of US regulators urged the federal government to work with other nations on crypto policy. 

“The United States continues work on the G20 roadmap for addressing challenges and frictions with cross-border payments, including on improvements to existing systems, potential impediments from data localization and other frictions in data governance frameworks, the international dimensions of CBDC designs, and the potential of well-regulated stablecoin arrangements,” a statement from the US Treasury said. 

The ECB also released a report on the environmental impact of cryptocurrencies, specifically when it comes to the carbon emissions related to mining tokens such as bitcoin and ether. 

“It is highly unlikely that EU authorities will restrict or ban fossil fuel cars by 2035 (as currently foreseen) but refrain from taking action for assets whose current yearly carbon emissions are enough to negate most euro area countries’ past and target GHG emission savings, as well as the current and future global net savings from the deployment of electric vehicles,” the climate report noted.

There is no consensus on the overall environmental impact of bitcoin mining. For example, some applications are expected to reduce greenhouse gas emissions by using flared natural gas that would otherwise be emitted into the atmosphere.

Ethereum plans to end proof-of-work mining as soon as September, which is expected to reduce the energy associated with ether issuance by around 99.9%

In any case, the speed with which the ECB hopes to enact policy is concerning to some industry members. 

“A ban on mining is not necessarily something bad, as long as the ecosystem has the time to prepare,” said Guilhem Chaumont, CEO and co-founder of Flowdesk, a French market-making and institutional compliance company. “Here we are talking about regulation that would be enforced in four years minimum, but there are many ongoing initiatives with regards to the transition from Ethereum to proof of stake, and things like this.”

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