Casey Wagner

In a speech this week, European Central Bank board member Fabio Panetta called for broader taxation on crypto assets, which he likened to a Ponzi scheme. 



“The EU should introduce a tax levied on cross-border crypto issuers, investors and service providers,” Panetta said during the speech on Wednesday. “This would generate revenues that can be used to finance EU public goods that counter the negative effects of crypto-assets.”



Cryptoassets have become the “bubble of a generation,” Panetta added, citing “easy-money” scams and misrepresentations of return rates across the asset class.&nbsp;



The speech comes as the European Union advances cryptocurrency-related policy in Parliament. The industry is beginning to unpack what this may mean for the future. 



In November, the EU passed the Digital Operational Resilience Act (DORA), a bill that was originally proposed as a package with the Markets in Crypto Assets Regulation (MiCA), which is expected to pass into law before the end of the year. DORA is expected to be formally adapted in 2024.&nbsp;



DORA, designed to target cyber fraud and attacks, will require financial institutions, including crypto companies, to report any cyber-related security breaches or compromises. The law also requires tech firms providing cybersecurity resources to handle oversight.&nbsp;



The crypto industry has expressed concerns about how the law will impact third party, non-EU based companies, giving the legislation a global impact, Monica Oracova, chief operating officer and co-founder of the Naoris Protocol, said. 



“The framework principles set up by DORA…do not address the existing collection of single points of failure in cybersecurity systems today,” Oracova said. “Only by implementing a decentralized security mesh, removing the points of weakness, and adopting cryptographic controls, zero-knowledge proofs and reports in a decentralized ecosystem, will we be able to see real improvements.”



DORA’s policies, Oracova added, will likely not effectively prevent hacks or phishing attacks, but they could make business owners more accountable regarding the selection and enforcement of cybersecurity. 



When it comes to crypto, no amount of technological innovation is likely to satisfy Panetta, who warned, “regulation will not turn risky instruments into safe money.”



“Instead, a stable digital finance ecosystem requires well-supervised intermediaries and a risk-free and dependable digital settlement asset, which only digital central bank money can provide,” he added.



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Crypto’s ‘Easy Money’ Scams Need Tougher Oversight – ECB Board Member

David Canellis

European central bankers, on brand as ever, have shared a tersely worded cope-memo decrying bitcoin and its dastardly ways — and inadvertently made the case for never regulating it.



The essay doubles as a no-coiner bingo card of sorts. It’s a string of silly misnomers and half-truths: “Bitcoin is rarely used for legal transactions” and “the market valuation of Bitcoin is therefore based purely on speculation.”



But within the ECB’s <a href="https://www.ecb.europa.eu/press/blog/date/2022/html/ecb.blog221130~5301eecd19.en.html" target="_blank" rel="noreferrer noopener">musings</a>, first published in German finance press Handelsblatt, there are a few points that actually ring true.



Director general Ulrich Bindseil and adviser Jürgen Schaaf rattled off an oft-cited criticism that says Bitcoin generates as much e-waste as the Netherlands (a <a href="https://www.theguardian.com/technology/2021/sep/17/waste-from-one-bitcoin-transaction-like-binning-two-iphones" target="_blank" rel="noreferrer noopener">statistic</a> based on <a href="https://datadrivenlab.org/climate/blockchain-energy-consumption-debunking-the-misperceptions-of-bitcoins-and-blockchains-climate-impact/" target="_blank" rel="noreferrer noopener">hotly</a> <a href="https://www.cnbc.com/2017/12/21/no-bitcoin-is-likely-not-going-to-consume-all-the-worlds-energy-in-2020.html" target="_blank" rel="noreferrer noopener">debated</a> modeling from former Dutch central bank collaborator Alex de Vries).&nbsp;



Dovetailing with that tidbit, the pair rightly point out that depreciation of mining hardware (described as an inefficiency of the system) is not a flaw, but a feature. “It is one of the peculiarities to guarantee the integrity of the completely decentralized system.”



That’s entirely true. Capitalistic game theory dictates the bitcoin industry relentlessly develop faster and more energy-efficient mining rigs. Miners want to spend the same amount of energy for more bitcoin, so they’ll invent new mining rigs that will generate more hash rate with less energy.



Miners that can’t afford them (or can’t access credit) will inevitably fall to the wayside, prioritizing efficiency across the board above all else.&nbsp;



In fact, the value proposition of the network relies heavily on its claim to decentralization; a bitcoin miner monopoly could very well render the network less valuable than if it were shared more equally — especially if they wield more than 51% of the hash rate.



This makes bitcoin mining as much a team game as it is a solo sport.&nbsp;



The freedom to develop, invest and accumulate bitcoin mining rigs directly inspires decentralization. Chinese chipset maker Bitmain was once a powerhouse of bitcoin mining, and some might argue a deeply centralizing factor, <a href="https://bitcoinmagazine.com/business/bitmain-nears-51-network-hash-rate-why-matters-and-why-it-doesnt" target="_blank" rel="noreferrer noopener">controlling almost</a> 51% of Bitcoin hash rate in 2018.



But <a href="https://www.coindesk.com/business/2021/01/26/bitmain-co-founder-exits-resolving-years-long-power-struggle-as-mining-firm-preps-ipo/" target="_blank" rel="noreferrer noopener">infighting</a>, restrictive regulations at home, and an untenable position in Bitcoin Cash has all but scrubbed Bitmain — which bases its entire business on the “inefficiency” of the Bitcoin system — from the mining map, with an array of bitcoin mining companies and pools taking its place.



The authors follow up that righteous Bitcoin factoid with another: Bitcoin should not be regulated as a form of payment or investment.&nbsp;



Schaaf and Bindseil actually justify never regulating Bitcoin by claiming it “appears neither suitable as a payment system nor as a form of investment.&#8221; But fewer words from a central banker have rung as soundly as Bitcoin “should be treated as neither in regulatory terms.”



Yes. That’s an excellent Bitcoin mantra: Do away with government-powered, Sauron-style surveillance of the Bitcoin network. And while you’re at it, scrap the tax regulations.



The Internal Revenue Service considers BTC an asset just like property, which renders every transaction a taxable event. This obviously renders some crypto-folks’ quests to pay for coffee and burgers with bitcoin a <a href="https://bitcoinmagazine.com/culture/bitcoin-tax-reporting-nightmare-2023" target="_blank" rel="noreferrer noopener">pain in the ass</a>.&nbsp;



Let’s hope the ECB’s wise suggestion of keeping big government out of little bitcoin catches on.



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Yes! The European Central Bank Gets This Right About Bitcoin!

<div id="highlights-block_635ab7bd51e62" class="highlights">
 <ul>
 <li>After the US dollar sank to three-week lows earlier this week, the currency showed signs of recovery Thursday with the US Dollar Index 0.5% higher</li>
 <li>The ECB again raised interest rates by 75 basis points Thursday, following eurozone inflation of 9.9% in September</li>
 </ul>
 
</div>



Bolstered by rising equities and a fluctuating US dollar, bitcoin has held its position over $20,000 since Tuesday. It is a key resistance level last hit in early October, but the looming central bank decision and rallying dollar may end bitcoin’s rebound. 



Traders are eager to see bitcoin’s relief run continue. The largest digital currency hovered around $20,600 Thursday morning after briefly approaching $21,000 earlier in the day. The S&amp;P 500 and Nasdaq opened lower, losing 0.2% and 1.4%, respectively.&nbsp;



“Bitcoin behaves like a commodity,” Nick Saponaro, CEO of blockchain Divi Project, said. “Like gold, it’s a store of value that has utility. So, there’s a demand for it no matter what’s happening in the macroeconomic environment.” 



After the US dollar sank to three-week lows earlier this week, the currency showed signs of recovery Thursday, with the US Dollar Index (DXY) up 0.5%. Bitcoin’s rally came in tandem with the dollar’s decline, as a weakened currency fuels risk-on appetite among investors, according to analysts.&nbsp;



“Gold gained 0.65% thanks to the weaker dollar and continued drop in yields amid the broader dovish pivot in central bank policy expectations,” Tom Essaye, founder of Sevens Report Research, said.



<blockquote class="wp-block-quote">“There are early signs that both the dollar and rates are beginning to roll over, but until we have more definitive evidence that both are actually peaking, it will be too early to call a bottom in gold,” he said.</blockquote>



Bitcoin, like gold, has been trading sideways for months, bringing uncharacteristically <a href="https://cms.blockworks.co/bitcoin-a-stable-investment-volatility-dips-below-nasdaq-sp-500/" target="_blank" rel="noreferrer noopener">low volatility</a> — the value of the world’s oldest currency in continuous use, the British pound, was <a href="https://www.bloomberg.com/news/articles/2022-10-20/uk-pound-is-almost-as-unstable-as-bitcoin" target="_blank" rel="noreferrer noopener">almost equally in flux</a>. The digital currency’s volatility compared with the Nasdaq and S&amp;P 500 indexes reached a two-year low earlier this week, according to data from research firm Kaiko. Any significant moves in either direction will be expected to bring volatility expansion.



<h3>Inflation and global liquidity</h3>



While equity market volatility is starting to lessen — the VIX has fallen to below 30 in the past five days — economists are still worried about global liquidity.&nbsp;



“After more than a decade of abundant liquidity and relative calm in markets, central bank interest-rate increases to contain inflation have been accompanied by elevated market volatility,” analysts from the International Monetary Fund wrote in a note Thursday. “Measures of market liquidity have worsened across asset classes, especially in recent weeks, as heightened uncertainty about the economic outlook and monetary policy left investors with much less risk appetite.”&nbsp;



The European Central Bank remains focused on bringing down inflation in the eurozone and, like last month, again raised its primary interest rates by 75 basis points Thursday. In September, euro-area inflation reached 9.9%, according to the ECB.



The Federal Reserve is scheduled to meet next week and give a rate decision on Tuesday. Futures markets are currently pricing in a 91.8% chance the central bank will opt for a 75 basis point hike, according to data from <a href="https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">CME Group</a>. Cryptos and equities will benefit from a slow down in hikes, whether it comes in November or December. 



“Markets have rallied on the idea that the worst of the global rate hikes are either one, already behind us, or two, about to be behind us,” Essaye said.



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US Dollar Recovers, Bitcoin Holds $20K as Fed Decision Looms

<div id="highlights-block_62d08f8673cdc" class="highlights">
 <ul>
 <li>Stablecoins generally must follow the same settlement rules as traditional finance, BIS said</li>
 <li>In the wake of UST, clear rules are essential, international governments agree</li>
 </ul>
 
</div>



As regulators around the world continue to evaluate the risks of the cryptocurrency industry and establish guidelines, stablecoins have become a top priority.&nbsp;



The International Organization of Securities Commissions (IOSCO) and the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) issued final guidance on stablecoin practices Wednesday.&nbsp;



“The recent market disruptions, while costly for many, were not systemic events,” Jon Cunliffe, chair of the CPMI and deputy governor for financial stability at the Bank of England, said in a <a href="https://www.bis.org/press/p220713.htm" target="_blank" rel="noreferrer noopener">statement</a>, presumably referring to the depegging of algorithmic stablecoin UST in May.



“But they underline the speed with which confidence can be eroded and how volatile crypto assets can be,” Cunliffe added.



<blockquote class="wp-block-quote">“Such events could become systemic in the future, especially given the strong growth in these markets and the increasing linkages between crypto assets and with traditional finance.” </blockquote>



The BIS guidance states that if a stablecoin acts as a means of transferring and is deemed “systemically important” it must follow traditional Principles for Financial Market Infrastructures (PFMI), international standards developed after the global financial crisis. Payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories must all follow the same guidelines.&nbsp;



The guidance comes shortly after the European Central Bank (ECB) released a <a href="https://cms.blockworks.co/ecb-issues-three-reports-in-effort-to-pass-biggest-crypto-law-in-europe/" target="_blank" rel="noreferrer noopener">report</a> on stablecoins and financial stability Monday. 



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



US regulators are also taking a closer look at the evolving industry. In the first of many expected digital asset reports following President Biden’s <a href="https://cms.blockworks.co/whos-in-charge-of-what-breaking-down-the-crypto-executive-order/" target="_blank" rel="noreferrer noopener">executive order</a>, a group of US regulators urged the federal government to work with other nations on crypto policy, specifically with regard to the cryptocurrencies designed to follow fiat currencies. 



Many industry members agree that current market conditions do highlight a need for stronger regulatory guidelines around stablecoins, particularly when it comes to transparency and auditing systems.&nbsp;



“If you just look at the events in April and May, basically the question everybody asked was ‘What are these stablecoins? Are they really stable? What is backing it?,’” Wolfgang Bardorf, senior vice president and group treasurer of Checkout.com, said during a Blockworks <a href="https://cms.blockworks.co/webinars/will-stablecoins-transform-the-business-of-banking/?source=twitter" target="_blank" rel="noreferrer noopener">webinar</a> Thursday.



“If you look at a lot of the guidance that has come out, it has very much been going in that direction.”



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Stablecoin Regulation Ramps Up Across the Globe With New BIS Guidance

<div id="highlights-block_62cdb50292a37" class="highlights">
 <ul>
 <li>The ECB said crypto is increasingly threatening financial stability </li>
 <li>&#8220;Recent developments show that stablecoins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of Tether,&#8221; the report noted</li>
 </ul>
 
</div>



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, <a href="https://cms.blockworks.co/eu-members-reach-agreement-on-mica/" target="_blank" rel="noreferrer noopener">ironed out</a> in late June. The law needs “to be implemented urgently,” the EU said in its <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202207_2~836f682ed7.en.html" target="_blank" rel="noreferrer noopener">report</a> 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.&nbsp;



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.&nbsp;



&#8220;Recent developments show that stablecoins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of Tether,&#8221; the report noted.



<a href="https://cms.blockworks.co/?s=terra" target="_blank" rel="noreferrer noopener">TerraUSD</a> (UST) was an experimental seigniorage system which suffered a failure of its algorithmic stability mechanism. It was fundamentally different from centralized stablecoins such as <a href="https://cms.blockworks.co/tag/USDC/" target="_blank" rel="noreferrer noopener">USDC</a> 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.&nbsp;



Treasury Secretary <a href="https://cms.blockworks.co/tag/janet-yellen/" target="_blank" rel="noreferrer noopener">Janet Yellen</a> 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.&nbsp;



“We’ve just had over this last week with Terra and with Tether an illustration of the risks associated with <a href="https://cms.blockworks.co/the-investors-guide-to-stablecoins/" target="_blank" rel="noreferrer noopener">stablecoins</a>…there can be runs,” Yellen said during a May congressional hearing.&nbsp;



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.&nbsp;



“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 <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/focus/2022/html/ecb.mpbu202207_focus1.en.html" target="_blank" rel="noreferrer noopener">DeFi report</a>. “To date, interlinkages with the traditional financial sector have been limited, but they have the potential to grow rapidly given institutional interest.”



<a href="https://cms.blockworks.co/us-regulators-release-first-of-many-reports-on-crypto-following-exec-order/" target="_blank" rel="noreferrer noopener">Earlier this month</a>, in the first of many expected digital asset reports following President Biden’s <a href="https://cms.blockworks.co/whos-in-charge-of-what-breaking-down-the-crypto-executive-order/" target="_blank" rel="noreferrer noopener">executive order</a>, a group of US regulators urged the federal government to work with other nations on crypto policy.&nbsp;



“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.&nbsp;



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.&nbsp;



“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 <a href="https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu202207_3~d9614ea8e6.en.html" target="_blank" rel="noreferrer noopener">climate report</a> noted.



There is no consensus on the overall environmental impact of <a href="https://cms.blockworks.co/bitcoin-mining-economics-explained/" target="_blank" rel="noreferrer noopener">bitcoin mining</a>. For example, some applications are expected to reduce greenhouse gas emissions by <a href="https://cms.blockworks.co/exxon-mobil-powering-bitcoin-mining-pilot-using-excess-natural-gas-report/" target="_blank" rel="noreferrer noopener">using flared natural gas</a> that would otherwise be emitted into the atmosphere.



Ethereum <a href="https://cms.blockworks.co/shadow-forks-and-testnets-the-ethereum-merge-approaches/" target="_blank" rel="noreferrer noopener">plans</a> to end <a href="https://cms.blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/" target="_blank" rel="noreferrer noopener">proof-of-work mining</a> 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.&nbsp;



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

<div id="highlights-block_62b3337464a07" class="highlights">
 <ul>
 <li>The euro is the second-largest currency in the world, but has no major stablecoin nowadays</li>
 <li>Negative interest rates have held euro stablecoins back, but the ECB&#8217;s move to raise interest rates may accellerate adoption</li>
 </ul>
 
</div>



Stablecoins are predominantly US-dollar pegged projects, but the euro is coming for its slice of the pie. <a href="https://cms.blockworks.co/circles-new-euro-backed-stablecoin-mimics-usdc/" target="_blank" rel="noreferrer noopener">Circle’s announcement</a> of EUROC (Euro Coin) last week gave experts some confidence there will be a major euro-pegged stablecoin in the near future, even if it’s not clear when.&nbsp;



“So far we&#8217;re not seeing any euro stablecoin of relevance: very low liquidity and adoption,” Fabian Scholz, co-founder and CEO of Kudona, a German-based and Lithuanian-licensed cryptocurrency exchange, told Blockworks.&nbsp;



The euro, shared by 19 European Union member states, is the second-largest currency in the world, just behind the US dollar. Despite its global market share at around 19% across various indicators of international currency use, the euro has an insignificant representation in stablecoins.&nbsp;



While the crypto ecosystem has seen capital leaving in this bear market, dollar-pegged stablecoins managed to increase their dominance as investors looked for shelter in these turbulent weeks. Notwithstanding blowups like TerraUSD (UST), stablecoins are seen as a vehicle to park value without having to cash out to fiat currency, which often incurs fees.



Until now, only a few stablecoins have been pegged to the euro, such as Tether’s EURt — a sister stablecoin to the largest dollar-backed issue, USDT — or Stasis’ EURS. Far from the scale of dollar-pegged stablecoins, EURt has a market cap of roughly $218.4 million and EURS’ market cap sits around $130.1 million, <a href="https://www.coingecko.com/en/categories/stablecoins" target="_blank" rel="noreferrer noopener">according to CoinGecko</a>.



According to a <a href="https://www.ecb.europa.eu/pub/ire/html/ecb.ire202206~6f3ddeab26.en.html" target="_blank" rel="noreferrer noopener">report published last week</a> by the European Central Bank about the euro’s international role, the share of the euro in crypto markets is “extremely small,” at 0.2%. The Eurozone’s central bank recognizes that “stablecoins pegged to the euro have started to gain popularity, although the market remains in its infancy,” but warns that “stablecoins should not be regarded as a new class of safe asset but rather as a less volatile but risky cryptoasset.”



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/ZeeU744pYr9edsVZGb36OPo8j5G0yGn6s_MUMcMRmPwA1v2-AYmfDpBi40pGmQWBg-1kHhwjc15zSgzBcYOQyjiya64uVixWQ4fBy3TAuUhlHmpyHgM5zgK33Ye_N4JBKaLmGxkOed8bhv6QMw" alt=""/><figcaption>Source: ECB</figcaption></figure>



Nevertheless, Patrick Hansen, EU policy expert and Crypto Venture Advisor at Presight Capital, believes there is a rising demand for a stablecoin denominated in euro which makes up to 40% of global SWIFT payments and 20% of FX global reserves.&nbsp;



“A widely-used and liquid euro stablecoin can enable and improve a wide range of interesting use cases for European investors and businesses: from a more efficient on/off ramp to crypto/DeFi, to remittance and B2B payments, a frictionless crypto FX market and much more,” Hansen told Blockworks.&nbsp;



Kudona’s Scholz predicts that big crypto players such as Circle or Binance “might be able to change that, but they&#8217;ll need a couple of months if not two or three years of adoption to increase liquidity and adoption on the DeFi side.”&nbsp;



That would be a game-changer for European investors, as they are exposed to FX (foreign exchange) risks against the dollar. So far in 2022, the eurozone’s currency lost 11% of its value against the dollar, and some analysts predict the two currencies will reach parity later this year.



For the moment, euro-based stablecoins are less liquid and “tend to be sold similarly to other risky assets rather than behaving like a vehicle in digital transactions and trading,” according to the ECB’s research. At the same time, the institution admits that a euro stablecoin could support the currency&#8217;s international profile.&nbsp;



<h3>Monetary policy normalization may accelerate adoption</h3>



A crucial question for an issuer of a euro-based stablecoin lies exactly in ECB’s purview. With its deposit facility rate at -0.5%, the European Central Bank makes it difficult to maintain a euro-pegged stablecoin with full reserves as issuers have to pay negative interest on bank deposits.&nbsp;



<blockquote class="wp-block-quote">“Negative interest rates on bank deposits are amongst the most important barriers for the development and growth of reserve-backed, Euro-denominated stablecoins,” acknowledged Hansen.&nbsp;</blockquote>



In a <a href="https://twitter.com/paddi_hansen/status/1515694575226032135?s=20&amp;t=zOafA3Hwha_hdU43d4UtqA" target="_blank" rel="noreferrer noopener">tweet </a>in April, before Circle’s announcement, Hansen calculated that the company could have to pay €250 million in interest on its euro reserves locked at the bank if it created a euro-pegged stablecoin with a market cap of €50 billion.&nbsp;



On EUROC’s website, Circle addresses the issue: “Circle assumes the interest rate risk on Euro Coin reserves, just as we do with USDC,” the company wrote.



But negative rates are about to become a thing of the past. The ECB announced it will raise its benchmark interest rate in July as well as in September. The deposit facility will follow suit, leaving negative territory and making it easier to sustain large amounts of euro reserves at the bank.&nbsp;



“This will undoubtedly be a key change and enabler for Euro-stablecoin issuers,” predicts Hansen.&nbsp;



<h3>Will regulation hurt or benefit euro-pegged stablecoins?</h3>



The ECB’s rate hikes come at a crossroads moment for European regulation towards crypto. The European Union is <a href="https://cms.blockworks.co/eu-negotiators-want-to-hammer-out-crypto-bill-this-month/" target="_blank" rel="noreferrer noopener">close to reaching a deal</a> on Markets in Crypto-Assets (MiCA), a landmark law that will shape crypto innovation in the Old Continent.&nbsp;



“It will without any doubt have a considerable impact on the Euro-stablecoin market, and I don&#8217;t expect most Euro stablecoin issuers to be able to navigate the complex MiCA requirements to the EU&#8217;s supervisor&#8217;s satisfaction,” said Hansen, adding however that “those who do, will benefit from greater institutional trust and adoption.”&nbsp;



Market players are still waiting to see MiCA’s final version. “It&#8217;s not set in stone yet, so we need to see its final draft,” said Scholz, whose company will be affected by the regulation.&nbsp;



<blockquote class="wp-block-quote">“I&#8217;m a fan of regulation because the general idea is usually to protect the consumer, which is essential in finance.”&nbsp;</blockquote>



However, the devil might be in the details. “The question is then what kind of regulation do you have and how does it get implemented and affect businesses. If it&#8217;s well-thought-out, it allows for innovation to continue without being too constrained,” said Scholz, who not only shares a name with, but is in fact nephew to Germany’s chancellor Olaf Scholz.



Even the ECB, which is part of the financial supervisors in the eurozone, has its eye on a likely greater adoption of a euro stablecoin in the future.



“Potential risks triggered by more widespread stablecoin adoption can be managed through the existing Eurosystem’s oversight framework,” the ECB concludes, pointing to the expected MiCA regulation and international cooperation on the regulation of cryptoassets.



And in the meantime, as President Christine Lagarde <a href="https://twitter.com/paddi_hansen/status/1539284201052200963" target="_blank" rel="noreferrer noopener">recently said</a>, legislators may need to get to work on MiCA 2.0.



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Rising Rates Could be a Game-changer for Euro Stablecoins Like Circle’s EUROC

<div id="highlights-block_62aa0cf6bfc2e" class="highlights">
 <ul>
 <li>European Central Bank holds rare unscheduled meeting as market conditions worsen</li>
 <li>S&#038;P and Nasdaq hold steady while BTC and ETH fall ahead of interest rate announcement</li>
 </ul>
 
</div>



The pullback in crypto markets continued Wednesday as firms cut staff while investors assess the damage from Celsius’ withdrawal halt and the <a href="https://cms.blockworks.co/crypto-fund-three-arrows-capital-facing-potential-insolvency-report/" target="_blank" rel="noreferrer noopener">apparent insolvency</a> of longtime digital assets hedge fund firm Three Arrows Capital.&nbsp;



The Federal Reserve is slated to announce an expected 0.75 percentage point interest rate hike Wednesday afternoon following the end of its two-day policy meeting. The European Central Bank, which was not scheduled to meet, issued a <a href="https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220615~2aa3900e0a.en.html" target="_blank" rel="noreferrer noopener">statement</a> saying it would “apply flexibility” going forward to combat increasingly turbulent markets.&nbsp;



“It&#8217;s become very clear that central banks are going to have to be very aggressive in countering mounting price pressures around the globe and that the probability of recessions has increased,” Craig Erlam, senior market analyst at OANDA, wrote in a note Wednesday. “Stagflation is not yet here but the risks around it have risen considerably in recent months which makes central bank responses all the more critical.”&nbsp;



Many more rate hikes will be demanded in the short term to get a degree of control over runaway inflation, Erlam said — and markets are not reacting well.&nbsp;



Bitcoin inched lower toward $20,000 early Wednesday while ethereum slid closer to $1,000. The tech-heavy Nasdaq and the S&amp;P 500 were both trading slightly higher ahead of Fed Chair Jerome Powell’s press conference, signaling the market has largely priced in a 75-point hike, according to Erlam.&nbsp;



“There is still a huge gap between nominal rates and real rates, so there is much more room for the Fed and other central banks to hike in the months to come,” said Mikkel Morch, executive director at digital asset hedge fund ARK36. “Investors can’t realistically expect risk assets to have a more sustained uptrend until the Fed pivots.”



The risk-off sentiment is likely not going to dissolve anytime soon, in Erlam’s estimation.&nbsp;



“Risk appetite has been obliterated and the days of ultra-low rates are behind us, there isn&#8217;t the same speculative mood that existed when bitcoin was exploding higher,” Erlam said. “There may still be a belief that bitcoin can thrive in the future but something that offers little now beyond speculative rallies is going to continue to struggle. Especially when we&#8217;re seeing headlines like those around Celsius and Binance.”




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Cryptos Extend Losses Ahead of Fed, ECB Announcements

<div id="highlights-block_626956f5e7b8e" class="highlights">
 <ul>
 <li>Ruble volumes surged in March, but not to a level that causes alarm</li>
 <li>Binance, which has the bulk of the ruble trading volumes, has taken steps to comply with sanctions requirements</li>
 </ul>
 
</div>



Two months since Russia’s invasion of Ukraine provoked unprecedented international sanctions, regulators remain concerned that crypto could offer a financial loophole for Russians. In the European Union, officials are confident that no relevant evasion is occurring following an agreement between countries to clarify that cryptoassets are under the scope of sanctions.



&#8220;We are currently examining whether cryptoassets could be used by Russia to circumvent any other measure we have introduced,&#8221; a European Commission spokesperson told Blockworks. &#8220;Our feedback from the markets is that there is broad awareness&#8221; that crypto is fully covered by EU sanctions.&nbsp;



<blockquote class="wp-block-quote">&#8220;What is important now is to continue and intensify enforcement work. In this context, we will continue to constantly monitor the market situation.&#8221;</blockquote>



The major concern is whether capital outflows from Russia through crypto markets might jeopardize the sanctions&#8217; effects on its economy. If there are any indications of non-compliance, the EU’s executive arm stands &#8220;ready to adopt additional measures to limit any circumvention risks.”



At this stage, EU officials believe that market information doesn&#8217;t indicate that crypto has been used to circumvent sanctions on a large scale, Blockworks has learned. Data from CryptoCompare, a British cryptocurrency market data provider, suggests that ruble trading volumes on crypto markets spiked in March, but sank thus far in April.



Rubles predominantly trade against the USDT stablecoin, followed by bitcoin and other cryptocurrencies. When the ruble was losing value, the volume could have been affected, because Russians needed more rubles to buy the same amount of crypto than before the war.



The ruble&#8217;s value has recovered over the past month — particularly against the euro — as Europe <a href="https://www.bloomberg.com/news/articles/2022-04-27/four-european-gas-buyers-made-ruble-payments-to-russia" target="_blank" rel="noreferrer noopener">grapples with Russia’s demand</a> for natural gas deliveries to be paid in rubles rather than euros.



&#8220;In February, USDT volume dominance grew from 20.3% to 27.4% and then to 59.9% in March. This could indicate that traders were using crypto as a way to flee ruble exposure as the currency fell,” research and data analyst from CryptoCompare James Webb said. “It will be interesting to see if future geopolitical tensions lead to upticks in fiat/stablecoin pair volumes as the market matures, and investors seek to minimize this inherent risk.”



Not all observers agree that crypto is benign when it comes to effective sanctions. In an analysis seen by Blockworks, Ukrainian crypto startup <a href="https://glprotocol.com" target="_blank" rel="noreferrer noopener">Global Ledger Protocol</a>, which focus on anti-money laundering (AML) risk assessment in digital assets, describes a model of how Russians may be able to avoid sanctions through over the counter brokers and exchanges. But it isn’t clear if wealthy oligarchs could make use of crypto rails given modest transaction limits imposed by crypto-fiat on-ramps.



<h3>Governments and regulators offer few details on crypto sanctions</h3>



In the EU, sanctions are enforced directly by its 27 member nations, but authorities have their hands tied due to a lack of legislation, which is still being discussed between the European Parliament and the Council of the EU, the governing body’s legislative branch. Blockworks contacted governments and central banks in the EU&#8217;s biggest economies — Germany, France, Italy and Spain — but none revealed details of their crypto sanctions efforts.&nbsp;



The French government, which is at the helm of the EU Council through June, said it is “implementing the sanctions against Russia on all types of transferable securities, including cryptoassets.&#8221;



<blockquote class="wp-block-quote">“The aim of the EU decision is to make sure these sanctions are implemented in a unified manner,” the French Ministry of Economy, Finance and the Recovery said.&nbsp;</blockquote>



The European Central Bank (ECB) said it only assesses the prudential implications of sanctions regimes by checking if European banks have the necessary arrangements to adhere to the sanctions in place. In March, ECB&#8217;s president Christine Lagarde warned that cryptoassets &#8220;are certainly being used, as we speak, as a way to try to circumvent the sanctions.&#8221;



ECB board member Fabio Panetta reiterated the point in <a href="https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220425~6436006db0.en.html" target="_blank" rel="noreferrer noopener">a speech Monday</a> that was <a href="https://cms.blockworks.co/lawless-crypto-industry-needs-harsh-regulation-european-central-bank-exec-says/" target="_blank" rel="noreferrer noopener">broadly critical</a> of the growth in digital assets.



The Bank of Italy said there was no official data regarding crypto sanctions, and the Bank of Spain disclaimed responsibility for sanctions enforcement.



The German Bundesbank told Blockworks that &#8220;prohibitions like the ones relating to cryptoassets are directly applicable&#8221; and that &#8220;violations of related prohibitions could be prosecuted as criminal or regulatory offenses.” The German central bank revealed that it took part in a survey by the European Banking Authority (EBA) on cryptoassets and sanctions, but the results are not yet public.



“Consistent with its convergence mandate, the EBA has been collating questions from industry and national authorities regarding questions about the EU’s sanctions regime and forwarding these to the European Commission,” EBA told Blockworks.



<h3>Binance appoints global head of sanctions and applies limits to Russian wallets&nbsp;</h3>



Last week, Binance, the exchange most widely used by ruble holders with over 50% market share, created a new global head of sanctions position and began <a href="https://cms.blockworks.co/binance-to-limit-services-to-russians-following-latest-round-of-eu-sanctions/" target="_blank" rel="noreferrer noopener">restricting service</a> to high-volume Russian users.



Unlike Coinbase, a US-based custodian that froze 25,000 Russian wallets, the biggest crypto exchanges in Europe contacted by Blockworks declined to disclose any figures.&nbsp;



&#8220;eToro always complies fully with all applicable rules and regulations, which includes sanctions, and it will continue to do so,” the company said.



A Crypto.com spokesperson said the company is &#8220;aware of and in compliance with all applicable sanctions requirements.&#8221;



Binance CEO Changpeng “CZ” Zhao had previously assured that the company had a compliance task force with “world-renowned sanctions and law enforcement experts,&#8221; and he denied the idea that crypto is a feasible option to outmaneuver the West&#8217;s financial punishment.



&#8220;We are meeting sanction requirements, and crypto is not useful to avoid sanctions,” <a href="https://www.binance.com/en/blog/leadership/ukraine-russia-sanctions-and-crypto-421499824684903532" target="_blank" rel="noreferrer noopener">he said in a blog post</a>.



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Are Crypto Sanctions Working in Europe?

<div id="highlights-block_626852f28f162" class="highlights">
 <ul>
 <li>European Central Bank officials are concerned about crypto’s volatility</li>
 <li>Many protocols make empty promises to investors in a similar way to a “Ponzi scheme,” Fabio Panetta said</li>
 </ul>
 
</div>



A European Central Bank (ECB) board member has taken a tough stance against digital assets, dubbing the business of blockchain a “lawless frenzy.”



Fabio Panetta, who has served on the ECB board since 2020, called for greater regulation of the emerging asset class to protect investors from the “Ponzi scheme” of cryptocurrencies.



“Crypto evangelists promise heaven on earth, using an illusory narrative of ever-rising cryptoasset prices to maintain inflows and thus the momentum fueling the crypto bubble,” Panetta said during a speech at Columbia University in New York Monday. “But appearances are deceptive. Satoshi Nakamoto’s dream of creating trustworthy money remains just that: a dream.”



The industry today bears a “striking” resemblance to the subprime mortgage crisis of 2008 that triggered the largest US economic downturn since the Great Depression, Panetta said.&nbsp;



Additional ECB officials, meanwhile, have voiced concerns over the pace of the industry’s growth. The European Union, like the US, is still in the early days of regulating digital assets.&nbsp;



ECB Vice President Luis de Guindos said while the asset class’ volatility has not yet had an impact on financial stability, it is a risky industry that regulators need to watch.&nbsp;



“At this pace of growth, we have to pay attention to it — especially in relation to issues such as terrorism financing and tax evasion,” he <a href="https://www.ecb.europa.eu/press/inter/date/2021/html/ecb.in211130~887737ac79.en.html" target="_blank" rel="noreferrer noopener">said in November</a>.



Isabel Schnabel, another board member, has previously called bitcoin “speculative,” adding its high volatility makes it “unsuitable as a store of value.”



Amid the call for greater oversight, the ECB has been investigating the use case for a central bank digital currency, Panetta told the European Parliament in March.



A government-issued electronic currency could revolutionize the payments systems, but there are concerns about privacy and security.&nbsp;



“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 wrote in a June <a href="https://www.ecb.europa.eu/pub/ire/html/ecb.ire202106~a058f84c61.en.html#toc18" target="_blank" rel="noreferrer noopener">report</a>.



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‘Lawless’ Crypto Industry Needs Harsh Regulation, European Central Bank Exec Says

Macauley Peterson

<div id="highlights-block_61bb6de2d796b" class="highlights">
 <ul>
 <li>The Bank of England raised interest rate by 15 basis points to 0.25%, in a near unanimous vote</li>
 <li>The European Central Bank leaves rates unchanged, but will taper its government bond purchases</li>
 </ul>
 
</div>



The Bank of England’s monetary policy committee (MPC), decided on Thursday to raise its Bank Rate to 0.25%, according to <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021" target="_blank" rel="noreferrer noopener">the committee’s minutes</a>, in a bid to dampen inflation. The 12-month CPI rate jumped from 5.1% in November, up from 3.1% in September, and the highest level since September 2011. The Committee voted by an eight to one margin in favor of the rate hike.



The move comes a day after the US Federal Reserve’s analogous group left rates unchanged but also <a href="https://cms.blockworks.co/fed-gets-hawkish-doubles-taper-signals-three-rate-hikes-in-2022/" target="_blank" rel="noreferrer noopener">moved to tighten monetary policy</a> by decelerating its asset purchase program more quickly than earlier planned.



Like the Fed, the Bank of England (BoE) policymakers expect that upward pressure on CPI inflation is driven primarily by supply disruption and should dissipate over time, returning closer to the committee’s long-term 2% target rate.



The MPC notes that the Omicron Covid-19 variant is spreading rapidly in the UK, but it’s medium-term economic effects remain unclear, while inflation has risen faster than anticipated.&nbsp;



The International Monetary Fund (IMF) UK staff weighed in with <a href="https://www.imf.org/en/News/Articles/2021/12/14/united-kingdom-staff-concluding-statement-of-the-2021-article-iv-mission" target="_blank" rel="noreferrer noopener">a policy statement</a>, Tuesday, targeted squarely at the BoE, warning against “inaction bias, in view of costs associated with containing second-round impacts.”



Unemployment in the UK is expected to be 4% in November, down 0.5%, indicating the labor market remains tight.



<h3>ECB calls for “flexibility”</h3>



In the Eurozone, inflation surged to 4.9% in November, the highest level ever recorded, <a href="https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-EN.pdf" target="_blank" rel="noreferrer noopener">according to Eurostat</a>.



At Thursday’s <a href="https://www.ecb.europa.eu/press/pressconf/2021/html/ecb.is211216~9abaace28e.en.html" target="_blank" rel="noreferrer noopener">European Central Bank (ECB) policy meeting</a> in Frankfurt, Germany, ECB President Christine Lagarde announced a scaling back of asset purchases under the pandemic emergency purchase program (PEPP), and its full discontinuance in March 2022.



<blockquote class="wp-block-quote">“We judge that the progress on economic recovery and towards our medium-term inflation target permits a step-by-step reduction in the pace of our asset purchases over the coming quarters. But monetary accommodation is still needed for inflation to stabilise at our two per cent inflation target over the medium term,” Lagarde said in her prepared remarks.</blockquote>



<hr class="wp-block-separator"/>



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<hr class="wp-block-separator"/>



The key ECB interest rates were left unchanged. Similar to the Fed’s policy, the ECB plans to wind down net asset purchases prior to raising rates.



Eurozone inflation is expected to remain elevated next year, but to decline over the course of the year, mirroring the outlook in both the UK and the US.



The US dollar weakened following the BoE and ECB announcements. The DXY, an index representing the USD against a basket of major foreign currencies, fell almost 0.5% in the two hours following the policy updates, but recovered by midday in New York.




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The ECB and Bank of England Grapple With Inflation

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.”