The European Central Bank (ECB) said on Tuesday that cryptocurrencies are largely unsuitable as an investment or a store of value.
The bank said if the current growth and market integration of cryptocurrencies persists, they could pose a bigger threat to the economy. But it still sees their popularity growing, especially among retail investors.
So far, despite volatility in the crypto market this year, it has not resulted in any major contagion to the real economy. But the ECB thinks this could change.
The ECB’s comments, which were released in a report, come shortly after President Christine Lagarde said crypto is “worth nothing.” The central bank has also previously derided crypto for its volatility and risks to investors.
ECB thinks crypto regulation lacking, investors vulnerable
A recent survey ECB shows that at least 10% of European households own crypto assets. Retail investors also make up a significant portion of crypto holders, according to the bank.
But it is on this notion that the bank states that crypto assets are lacking in consumer protection risks. Investors in the space are more vulnerable to fraud, regulatory relief mechanisms and market manipulation.
While major crypto projects are growing, the ECB says they lack “internal shock absorbers” for extreme market events. A recent example of this is the Terra crash, which occurred largely due to the blockchain’s inability to keep up with the selling of its stablecoin.
More crypto regulation ahead?
The ECB now appears to be targeting DeFi. The bank said that web3 platforms offering services similar to banks would likely need to comply with traditional regulations to avoid legal issues.
The bank cited the need for leverage in DeFi protocols, which would ensure their operation even during times of market duress.
Currently, the crypto-asset deposit/lending industry is still quite small compared with traditional banking, although it could continue to grow rapidly.
Beyond DeFi, the bank once again called for lawmakers to bring crypto under their regulatory fold. Current efforts are already being made to subject crypto to European money laundering practices.
But the ECB also sees a lack of clear data on cryptocurrencies as a major hurdle for more regulation.
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