He said there is an "urgent need globally for regulation to protect consumers from the risks of cryptoassets, define minimum requirements for crypto firms’ risk management and corporate governance, and reduce the run and contagion risks of stablecoins," adding that "we should also tax cryptoassets according to their social costs."

Panetta concluded that 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."

Mining the environment – is climate risk priced into cryptoassets? discusses the climate transition risk of certain cryptoassets and highlights potential policy responses for authorities, including prudential standard-setters. To this end, the article provides an overview of the estimated carbon footprint of certain cryptoassets such as bitcoin and its causes. It goes on to highlight that an alternative and much less energy-intensive blockchain technology exists that can achieve similar results. Finally, it presents potential policy options.

A deep dive into crypto financial risks: stablecoins, DeFi and climate transition risk - This issue of the Macroprudential Bulletin takes a deep dive into the risks and policy implications of several segments of the cryptoasset market. 

Stablecoins’ role in crypto and beyond: functions, risks and policy discusses the financial stability implications of stablecoins stemming from their current role in the cryptoasset ecosystem. It analyses the importance of stablecoins within wider cryptoasset markets before going on to examine whether they fulfil the requirements of practical means of payment in the real economy. Finally, the article highlights what the current role of stablecoins implies for financial stability and the importance of their regulation.

The ECB said that the major disadvantage of cryptoassets is their price volatility. The volatility of cryptoassets has in recent years been higher than the volatility observed, for example, in various commodities markets. This shows the extent to which cryptoasset investors are subject to market risk. Furthermore, this high volatility means that cryptoassets cannot properly perform the three functions of money: a store of value, a means of payment and a unit of account.

In an attempt to circumvent the problem of high price volatility, financial service providers and technology companies have launched a new class of cryptoassets, known as stablecoins, that use stabilisation mechanisms to minimise price fluctuations. Depending on the stabilisation mechanism used, the value of the stablecoin may be backed by:

• holdings of money (in one currency or a basket of different currencies);
• securities and commodities such as gold;
• cryptoassets; or
• a mechanism attempting to match demand and supply (i.e. algorithmic stablecoins).

In 2019, particular attention was paid to certain stablecoin initiatives that claim to enable faster transactions at potentially lower costs on a global scale by providing a new separate payment arrangement. However, stablecoins have not yet been tested on a large scale and pose a number of legal, regulatory and oversight risks. Before stablecoin initiatives go live these issues must be addressed through appropriate system design and governance, and risk-proportionate oversight requirements and regulation.

Cryptoassets and stablecoins have sparked a broader debate on payments innovation and on the roles of the private and public sectors in devising new ways to make payments more affordable, efficient and inclusive. The issuance of a CBDC could potentially address the social demand for new innovative, efficient and resilient tools for making payments. But various design features of CBDC could have far-reaching implications for the financial system that need to be carefully assessed. With regard to the retail payments ecosystem, the CBDC design should neither exclude possible collaboration with the private sector nor crowd out private market-led solutions for fast and efficient retail payments in the euro area.

Reporting burden

Another chapter of the report focuses on how to contain the reporting burden for banks and on statistics relating to FinTech, including cryptoassets.