The European Central Bank (ECB) has released a report titled 'A deep dive into crypto financial risks: stablecoins, DeFi and climate transition risk' ahead of the implementation of regulatory frameworks across the European region.
At a high-level, the report notes that digital asset markets are evolving rapidly and claims that if current trends continue, crypto-assets may pose risks to financial stability and are in need of effective regulation.
A closer inspection of the report reveals the ECB also continues to voice its concerns for the impact of crypto-mining on the climate, noting the balance between incentivising the 'crypto version of the electric vehicle' or incentivising the 'proof-of-stake' method of mining, which the Ethereum network is poised to switch to in the upcoming 'merge'.
The ECB considers that public authorities are unlikely to take a hands-off approach:
Policy action by authorities (e.g. disclosure requirements, carbon tax on crypto transactions or holdings, or outright bans on mining) is probable.
The ECB further observed that a majority of protocols in DeFi are far more centralised than people may expect, relying on Uniswap as an example. The ECB pointed out that 1% of the total token holder addresses held approximately 97% of the total token supply.
The report was highly critical of stablecoins which the ECB has been pushing back on since early 2021. The ECB primarily relied upon the example of the recent collapse of the Terra ecosystem:
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 did not consider or provide any analysis of stablecoin volatility and the devaluation and instability of fiat currencies due to various central bank's monetary policy and inflation.
This sentiment has certainly been echoed domestically in Australia, with the Governor of the Reserve Bank of Australia, Philip Lowe, conceding that monetary policy employed during the pandemic contributed to the instability of fiat currency leading to dramatic levels of inflation. While crypto has been touted as an inflation hedge, the price performance in recent times has been more akin to a technology stock, but that may well prove to be a short term price movement as the fixed supply nature of Bitcoin in particular stands in contrast to the growing monetary supply.
One thing is certain from the ECB report, crypto products are being taken more seriously than ever before, and smart minds are considering how to best balance consumer protection and innovation (which are not necessarily opposing forces) as stablecoins and other crypto assets grow in popularity.