Crypto assets have little impact on monetary policy, says ECB team

Crypto assets do not have any serious implications for either monetary policy or the real economy, and they do not fulfil the functions of money, researchers from the European Central Bank have said.

The ECB Crypto-Assets Task Force examined recent developments in the market, and their potential impact on monetary policy and financial stability. They reported their findings in a paper on May 17.

The group says that “in the current market, crypto assets’ risks or potential implications are limited and/or manageable on the basis of the existing regulatory and oversight frameworks”.

However, the paper warns the ECB should continue to monitor crypto assets, as the situation could change quickly if they start to fulfil the functions of money, and become a credible substitute for physical currency and deposits.

At present, the researchers consider it unlikely that crypto assets can fulfil the functions of money due to their high volatility. The paper notes bitcoin’s prices have varied wildly, with price changes even higher than those experienced during famous historical bubbles such as ‘Tulip mania’.

The high volatility means the assets cannot be used as a reliable store of value, means of payment or unit of account.

Crypto assets’ volatility is partially due to their lack of protection by official institutions, which could be eliminated through a central bank digital currency (CBDC), the researchers say.

Nevertheless, the task force concludes “current conditions do not warrant the issuance of CBDC in the euro area”, as Europeans have “access to a wide range of electronic payment instruments underpinned by sound clearing and settlement infrastructure”.

The team also notes the risks of CBDCs, saying they could induce holders to withdraw a substantial amount of liquidity from the banking system. Other central banks have expressed a reluctance to press ahead with CBDC projects on similar grounds.

Meanwhile, the lack of European merchants who allow purchases of goods and services using crypto assets also severely hinders the assets’ penetration of the financial system. Merchants are unlikely to accept crypto assets due to their volatility, and the euro area accounts for only around 10% of the total trading in bitcoin, the paper says.

In a speech earlier in May, ECB head Mario Draghi said crypto assets hold “a very small place, if any at all” in the financial market due to their high level of risk. Draghi was adamant that “cryptocurrencies, bitcoins and such things are not real currencies”.

By contrast, he said: “One euro is one euro, today, tomorrow or in a month; it will always be one euro. And the ECB is behind the euro.”