It is of the utmost importance that rules are swiftly agreed upon internationally to regulate the use of crypto-assets such as Bitcoin, Ethereum and Tether. Effective regulation helps to ensure that the innovative added value of the technology that underlies crypto-assets – their potential for storing and transferring value by means of digital tokens without the need for a central party – can be leveraged, while avoiding stifling such innovative added value due to the risks involved in the current speculative nature of cryptos. New and amended rules, which must always aim to contribute to society's trust in the financial system, payment systems and monetary policy, must serve to support the emergence of crypto-assets.
This is what our Executive Board members Steven Maijoor and Olaf Sleijpen said today, marking the presentation of the new, comprehensive study entitled “Crypto-assets: evolution and policy response”. DNB decided to conduct the study because the rapid development of crypto-assets is affecting many tasks and objectives of an integrated central bank and supervisory authority. While the crypto markets have become somewhat less hyped over the past six months due to global interest rate hikes, investment fraud and cybercrime, cryptos are here to stay, and international financial authorities simply cannot afford to look the other way.
The new study analyses crypto-assets and the markets in which they are traded, the opportunities and risks they present, and the amendments needed in regulation.
Clearly, unbacked cryptos like Bitcoin are not suitable for use as money. Their prices are too volatile for them to properly fulfil the functions of a means of payment, store of value and unit of account. The lack of underlying assets and the absence of a monetary authority stabilising their value give rise to significant uncertainty about their value. The sheer number of cryptos and the lack of coordination also make them unsuitable as a unit of account. To be used as such, prices would have to be displayed in Bitcoin, Ether, Sol, Ada and XRP, for example, which is confusing.
Such cryptos are often promoted as an alternative to the global monetary system as currently maintained by monetary authorities, and they are indeed being used to make payments in a small number of countries and in limited circles. Still, they are mostly traded for speculative reasons. Their volatility increases their speculative value for intermediaries and investors, including consumers. It also means they are an extremely risky and volatile investment. Market regulation and investor protection have thus far been lacking.
Stablecoins should be able to prevent such volatility. They are crypto-assets that are backed by underlying assets such as euros, dollars or other assets. This could also add to the benefits of decentralised transaction settlement, for example in a blockchain. But it is inherent to stablecoins that they are closely related to the regular financial system. Without proper regulation, the widespread use of stablecoins could pose serious risks to financial stability. Risks could arise, for example, when financial parties raise and lend money using cryptos in what is known as decentralised finance without being subject to financial supervision.
The technology that underlies crypto-assets certainly offers promising potential. For example, it allows a payment platform to be hosted decentrally without the involvement of traditional parties. Stablecoins can also contribute to cheaper cross-border payments. There are of course risks involved, but also opportunities. The opportunities only become truly apparent, however, when cryptos are backed by stable money.
So far, the rise of crypto markets has prompted welcome initial amendments to existing rules for the prevention of financial crime such as money laundering, including in the Netherlands. Internationally, other regulations are now also under scrutiny, such as those for securities trading and for prudential supervision of financial parties such as banks.
New European regulations, such as the Markets in Crypto-Assets Regulation (MiCAR) currently under consideration in Brussels, differentiate between backed and unbacked cryptos and take the first steps in the areas of crypto issuer requirements, disclosure and prevention of market manipulation. It is important to note that laws, regulations and supervision will never mitigate all risks, if only because of the international nature of cryptos. This means investors and users of cryptos will always have to ensure they are aware of the risks associated with cryptos. In the coming years, DNB will work to further contribute to international standards and adapt our supervision based on new legislation.
For more information, please call Lisa Neves Gonçalves (+31 6 524 69 58) or Tobias Oudejans (+31 20 524 3100 or +31 6 524 96 961).
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