EU Report Claims State Cryptos Could Create a Stable System

EU Report Claims State Cryptos Could Create a Stable System

A recent European Union (EU) report has concluded that central bank digital currencies (CBDCs) could result in a more stable financial system because of their ‘disruptive’ ability. The report recognized the opportunities for oppressed countries to use cryptocurrencies. Although, it also highlighted the risks of volatility in the cryptocurrency market.

The accurate and in-depth report was requested by ECON committee. In the report, the EU has set out a detailed analysis of the benefits and risks of cryptocurrencies and CBDCs.

It concludes by mentioning that CBDCs may require improvements with respect to the fractional reserve system of the current banking system and this might ‘finally lead the way for a more stable financial system.’ However, the report also states that there are a number of risks involved in the crypto trade.

The report raises the issue of volatility in crypto markets. Though It mentions that this may decrease with an increase in trading pairs of cryptos. It might also decrease if investors start using Bitcoin instead of just holding it. Dr. Tony Richards, The head of payments policy of Reserve Bank of Australia (RBA), had also stated that due to reasons of volatility, Bitcoin is unlikely to succeed in Australia.

The EU report suggests that fiat-to-crypto trading pairs might lead to an unstable financial system. It claims that the combination of volatility in the crypto market and an increase in links to the fiat market may lead to ‘huge risks for all involved actors.’ If a bank links a financial instrument to a cryptocurrency, such as a crypto ETF, the value of the derivative can similarly fluctuate to the same degree.

The paper also said:

“The number of fiat-to-crypto trading pairs is gradually increasing. This could lead to a natural separation of the demands for individual cryptocurrencies, resulting in a reduction of Bitcoin volatility and a desynchronization in the development of the values of cryptocurrencies.”

The report raises two important issues where cryptocurrencies have been used to help the populations of Venezuela and China. It is said that in China they have been used to avoid the government’s strict capital controls. This is under threat as China has begun a huge crackdown on cryptocurrencies.

The EU report mentions: “In Venezuela, where the population suffers from the dysfunction of the traditional monetary system, cryptocurrencies help to make simple payments such as for groceries or medical bills. The government even went a step further and launched its own sovereign virtual currency (‘Petro’) in an attempt to get around U.S. sanctions. However, the proposed mechanism to link the value of this currency to barrels of oil is very questionable.”

The report criticizes the lack of information present in a lot of whitepapers and an absence of valid postal addresses. It states the lack of information of regulations and what laws are applicable to initial coin offerings (ICOs). However, it does also call on the European authorities to clarify laws and regulations applicable to different types of ICOs.

The report states: “The recent flood of ICOs contains a large number of highly questionable proposals that do not pass muster under traditional due diligence.”

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Aayushi Dhawan
Aayushi Dhawan is an avid reader, researcher, crypto writer and a passionate student. While pursuing her graduation in commerce at SRCC, she realized that writing and Finance give her immense pleasure. She is currently pursuing her post graduation in Commerce (Finance) from Department of Commerce, Delhi School of Economics and keeps on exploring the intricacies of research, her biggest strength.