Casey Wagner

Central bank leaders from around the world moved markets Wednesday when the group gathered at the European Central Bank policy forum in Portugal to defend their current monetary policy strategies.



Federal Reserve Chair Jerome Powell, Bank of England Governor Andrew Bailey, ECB President Christine Lagarde and Bank of Japan Governor Kazuo Ueda took the stage Wednesday afternoon in Sintra. The discussion was <a href="https://www.youtube.com/watch?v=FeK-DMLnGVs">live streamed</a>.&nbsp;



Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>) lost about 1.5% and 1.7% respectively, an hour into the panel discussion. Meanwhile, the S&amp;P 500 dipped 0.2% and the tech-heavy Nasdaq Composite hit a session high early in the trading session, rallying around 0.2%.&nbsp;



Powell said that additional consecutive rate hikes in the US are still possible, depending on the status of the labor market and the rate of inflation. When asked about whether the Fed is concerned about moves in the stock market, Powell denied that equity prices alone play any meaningful role in monetary policy.&nbsp;



“We&#8217;re not focused on any one market. we&#8217;re never thinking, ‘oh, let&#8217;s do this to this market,’ it&#8217;s just in general,” Powell said. “I look at broader financial conditions. it&#8217;s one of…many, many conditions.”&nbsp;



Powell, Lagarde and Bailey agreed that there does remain a risk of a recession, although the probability of one is “unlikely.”



Central bank leaders agreed that monitoring inflation continues to be a priority. Ueda added that the Bank of Japan has elected not to raise rates as inflation in Japan remains under 2%.



If rate hikes continue to take longer than expected to impact inflation, increases will have to continue, the trio noted.&nbsp;



There are, of course, global factors to consider, Lagarde added. Namely the ongoing war in Ukraine and recent civil unrest in Russia, the impact of which could be either inflationary or disinflationary, only time will tell, she said.&nbsp;



In terms of what leaders are watching, and their optimism that a recession will not occur in the near future, Lagarde said that the ECB’s approach to digital currencies is encouraging her.&nbsp;



“Today the European Commission has published the legislative draft for the European Digital for the digital Euro, for our CBDC, and that gives me hope because I think that it really demonstrates the capacity to innovate,” she said. “We want to get it right, so we&#8217;re not going to do a half-start or fake-start, we will move with success.”



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Central bank heads move markets, defend their inflation-fighting strategies

Sebastian Sinclair

The European Systemic Risk Board (ESRB) said Thursday despite a volatile year for crypto, its effect on traditional financial systems has been minimal. Even so, the board still cautioned for further oversight.



This marks a slight shift in urgency, where the European Central Bank (ECB) has previously called for <a href="https://blockworks.co/news/ecb-issues-three-reports-in-effort-to-pass-biggest-crypto-law-in-europe">immediate regulations</a> to curb <a href="https://blockworks.co/news/ecb-central-banks-will-lose-control-without-a-digital-currency">systemic risks</a> posed by crypto.



While European lawmakers eventually answered the call via the Markets in Crypto Assets or <a href="https://blockworks.co/news/eu-parliament-passes-mica-vote">MiCA regulation</a> in response in April — which set standards for stablecoin regulation and crypto oversight — more legwork is required, the ESRB said.



The ESRB is closely linked with the ECB, providing secretarial and logistical support with the bank’s president, Christine Lagarde, serving as the board’s chair.



In a <a href="https://www.esrb.europa.eu/pub/pdf/reports/esrb.cryptoassetsanddecentralisedfinance202305~9792140acd.en.pdf?853d899dcdf41541010cd3543aa42d37">report</a> published Wednesday, the financial watchdog stressed the need for continued surveillance, namely around DeFi and smart contracts, which fall short of MiCA’s mandate.



Given the impressive growth trajectory and unpredictable future of crypto markets, the potential systemic risks cannot be dismissed, the report reads.



“These risks could materialize if, for example, interconnectedness with the traditional financial system increases over time,” it said.



For now crypto posed no such risks following a rout in the industry last year, the ESRB said.



Still, the report recommends policymakers implement several changes to quell existing regulatory concerns. Those include regular reporting requirements for financial institutions with crypto exposure.&nbsp;



Gasper Stih, marketing director at ZondaCrypto, told Blockworks that while the report’s language and message differs somewhat from years past, the ESRB is maintaining a similar theme.



While the report attempts to give the impression of overarching systemic risk, it also acknowledges the DeFi market as being &#8220;very small.&#8221;



“This seems to indicate that any threat perceived by the ECB is one that only exists some way into the future, hinting at a possibility that the board may be underestimating the speed at which the crypto and DeFi market typically progresses,” Stih said.



<h2 class="wp-block-heading">A short-term fix</h2>



The ERCB stressed the need to identify and address systemic risks stemming from these areas, suggesting that the potential for prudential, reputational or operational risks could be magnified.&nbsp;



As such, the ESRB recommended promoting EU-level knowledge exchange and monitoring of market developments. This includes a particular focus on operational resilience, DeFi and digital asset staking, and lending activity.



The intent, they say, is to identify, assess and mitigate potential risks to financial stability and the effectiveness of macroprudential policy.&nbsp;



Though that shouldn’t be the only area of focus, Stih said.



&#8220;What’s more important going forward is a focus on reducing manipulation and exploitation of crypto and DeFi, as these remain key factors that continue to cause undue volatility in the market.&#8221;



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Europe’s Systemic Risk Board Raises Alarm Over Crypto and DeFi

<div id="highlights-block_62a3a31b85428" class="highlights">
 <ul>
 <li>IMF report suggests countries, crypto infrastructure providers move away from proof-of-work-based CBDCs</li>
 <li>CBDCs should be better for the environment than existing systems, analysts said</li>
 </ul>
 
</div>



A new study from the International Monetary Fund urges countries looking to develop CBDCs to consider energy consumption when making their design choices.



Central banks should “design CBDCs [central bank digital currencies] with the explicit goal to be environmentally friendly,” the IMF said in the <a href="https://www.imf.org/en/Publications/fintech-notes/Issues/2022/06/07/Digital-Currencies-and-Energy-Consumption-517866" target="_blank" rel="noreferrer noopener">report</a>. The payments system broadly, including central banks’ legacy systems, uses a large amount of energy, and moving toward renewables across the entire financial sector should be the goal, IMF analysts added.&nbsp;



“What we are seeing now is a broader realization that if CBDC is going to be an infrastructure, it has to be better than the one we have,” Carmelle Cadet, CEO of CBDC infrastructure provider EMTECH, said. “In addition to processing payments faster, with easier traceability and trust, CBDC has to be energy efficient.”&nbsp;



“Major cloud service providers are shifting toward renewable sources of energy such as geothermal and hydropower, as well as toward locations with colder climates, to reduce the carbon footprint in generating power,” the report read. “Adding the environmental footprint as a selection criterion of a cloud partner can benefit not only the CBDC project, but also any future digitization project of a central bank.”&nbsp;



The IMF also recommends that countries and crypto companies move away from energy-intensive proof-of-work protocols, a suggestion some say could impact user experience.&nbsp;



“Different protocols focus on various priorities…you have trade-offs that might not align to energy efficiency,” Cadet said.



The report comes as more nations, particularly developing countries, make strides toward launching their own CBDCs, which advocates say can drastically improve the lives of those living in predominantly cash-driven societies.&nbsp;



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration [for developing a CBDC],” a recent report from the <a href="https://www.bis.org/publ/bppdf/bispap123.htm" target="_blank" rel="noreferrer noopener">Bank for International Settlements</a> said. “Other significant considerations include strengthening competition among payment service providers (PSPs), increasing efficiency and reducing the costs of financial services.”&nbsp;



Jamaica <a href="https://cms.blockworks.co/in-historic-move-jamaica-makes-cbdc-akin-to-cash/" target="_blank" rel="noreferrer noopener">has already approved</a> its upcoming CBDC as legal tender in the nation. Brazil, Nigeria and Haiti are among the jurisdictions exploring the establishment or expansion of CBDCs. The Central Bank of the Bahamas’ Sand Dollar became the world’s first CBDC in 2020.



With environmental, social and governance-focused investing and climate change at the front of many minds, it is not a surprise that the IMF is choosing to focus on how digital assets impact the environment, according to another CBDC expert.&nbsp;



“Central banks are thinking about energy, and they should be thinking about energy,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs. “Energy efficiency is not just about how to do this with digital currency, it is also about the lack of energy efficiency and moving physical currency, which is also an issue.”



Correction: An earlier version of this story featured an image of Christine Lagarde, who was the Managing Director of the IMF until 2019 when she became the President of the European Central Bank.



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Consider the Environment When Designing CBDCs, IMF Urges

Jacquelyn Melinek

<div id="highlights-block_60ef0d6d86b9a" class="highlights">
 
</div>


<div id="highlights-block_60ef0d8786b9b" class="highlights">
 <ul>
 <li>Prior to the investigation phase, ECB conducted experiments over the past nine months and found no “technical obstacles identified” </li>
 <li>Skeptics say that digital fiat currencies still have problems with unlimited supply and lack of transparency </li>
 </ul>
 
</div>



The European Central Bank’s Governing Council launched its investigation phase of a digital euro today, it said in a statement.&nbsp;



The investigation phase will last 24 months and will focus on addressing “key issues regarding design and distribution” of a digital euro, it said.&nbsp;&nbsp;



The digital euro, which would be categorized as a Central Bank Digital Currency, would have to help prevent illicit activities and avoid any “undesirable impact on financial stability and monetary policy.” The <a href="https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210714~d99198ea23.en.html">project</a> won’t be predetermining any decisions on a possible issuance of a digital euro and “in any event, a digital euro would complement cash, not replace it,” the statement said.&nbsp;



“Different from the crypto movement, fiat currencies, whether they are digital or paper, are still fiat currencies with all the problems of unlimited supply and lack of transparency,” said Permission.io CEO Charlie Silver in an interview with Blockworks.  



The project will focus on a possible design to fit users’ needs. It will look into the functionality and usage that a digital euro would have in regards to being a riskless, accessible, and efficient form of digital central bank money. Additionally, the project will assess the possible impact of a digital euro on the market.&nbsp;



“Our work aims to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money,” said ECB President Christine Lagarde. 



In June, the ECB said that central banks that chose not to establish official digital currencies are risking losing autonomy and control over their financial systems, Blockworks previously <a href="https://cms.blockworks.co/ecb-central-banks-will-lose-control-without-a-digital-currency/">reported</a>.



“Issuing a central bank digital currency would help to maintain the autonomy of domestic payment systems and the international use of a currency in a digital world,” the ECB said in a <a href="https://www.ecb.europa.eu/pub/ire/html/ecb.ire202106~a058f84c61.en.html#toc18">report</a>.&nbsp;



Separately, ECB conducted experiments over the past nine months prior to the investigation phase and found no “technical obstacles identified.” It also noted that digital euro infrastructure would be environmentally friendly, based on the power usage “to run tens of thousands of transactions per second is negligible compared with the energy consumption of crypto-assets such as bitcoin.”



People and institutions that are critical of crypto-assets, like bitcoin, often point out how cryptocurrency harms the environment through energy usage, but <a href="https://www.cnbc.com/video/2021/04/26/ark-investments-analyst-says-76-percent-of-bitcoin-miners-are-using-renewable-energy.html">76% of bitcoin miners are using renewable energy</a>, Yassine Elmandjra, a blockchain and cryptoasset analyst at Cathy Wood’s Ark Investment Management, said in an interview with CNBC.&nbsp;



Bitcoin mining and its environmental impact have been a popular conversation in mainstream news as Tesla CEO Elon Musk has <a href="https://twitter.com/elonmusk/status/1392602041025843203?s=20">tweeted</a> about environmental concerns and countries like China have <a href="https://cms.blockworks.co/china-mining-exodus-seen-as-positive-for-bitcoin/">cracked down</a> on its country’s mining industry.



“All the major fiat currencies will be going digital in the coming years,” Silver said. “It makes sense for governments just on a practical logistic level.”