The European Central Bank, with a 42-page technical and legal text, signed by its head, Christine Lagarde, sets limits on the European Commission’s proposed legislation on cryptocurrencies and the amendment of the current Directive 2019/1937.
On 22 February, the European Commission received the ECB’s response to the opinion it was asked last November on the institution of cryptocurrencies, so that, on the one hand, rules could be put in place and, on the other, the Eurozone could not lag behind in digitizing transactions, creating new digital applications and the growing demand for digital currencies and FinTech applications and services.
The ECB, after stating that the modernisation of the existing framework in order to meet the trends and needs of the time is welcome, then lists a number of terms and conditions. In fact, he makes specific remarks even in the wording of the ECB’s legislative proposal, deleting and rewording terms, even whole articles.
“No bitcoin type”
From the style of the answer it is clear that Mrs. Christine Lagarde remains steadfast in the view she has expressed publicly and in recent conferences. This view can be summarised by the following phrase:
“Yes in development, yes in digital currencies, even in cryptocurrencies, as long as they are coins issued by central banks and not in bitcoin-type cryptocurrencies that are used for criminal activities and money laundering “.
In fact, in a recent speech she clarified that a central bank such as the ECB has nothing to do with bitcoin-type cryptocurrencies that are being investigated for criminal activities by competent authorities, without giving further details.
“Yes, but under certain conditions”
The opinion sent by the ECB to the Commission on the creation of an institutional environment, amending an existing directive, includes the following recommendations:
- A more detailed description of what is cryptocurrency and what is not should be made, both based on the technology it uses and whether it corresponds to a fixed value (eg gold, coin basket, etc.) or a credit institution or central bank requirement.
- The proposed directive should distinguish between cryptocurrency and digital currency (e-money). The first must be a currency, by all means, the second is a means of payment. And in this case, in the Eurozone, the digital currency will be a means of payment in euros.
- National central banks or banking institutions or other providers may issue cryptocurrencies, but under strict conditions. For example, in the case of national central banks, they will have to be responsible for supervising, settling and clearing, which are quite complicated for the ECB, especially in the case of currency and cryptocurrency transactions. At this point, the Commission is called on to consider the proposal in more depth and with greater attention to legislation and technical difficulties, as well as to the monetary rules of the Eurozone. Another example is that the limit on the circulation of cryptocurrencies needs to be determined, whether they will have an interest rate and how it will be implemented, and whether this creates a problem with monetary policy and financial stability.
- If a bank within the Eurozone issues a cryptocurrency, it will have to be placed under special supervision by the national central bank and the ECB. At the same time, it proposes a stress test specifically for the risks associated with this cryptocurrency and the liquidity of the institution.
- If third-party providers can issue cryptocurrencies, they must cooperate, i.e. open an account, with a credit institution operating and supervised by its national central bank, the ECB and the Eurosystem.
- The same as it is and more stringent should be the supervision, the controls and the introduction of special stress tests, in case a provider or bank accepts transactions between currencies and cryptocurrencies.
- In the case of institutionalisation of cryptocurrency, regardless of technology or platform (blockchain, DTL-distributed ledger technology) it should in principle be a currency, in return and governed by the rules of the Eurozone and the Eurosystem. Under no circumstances should it be a vehicle for anonymity, highly volatile, with no reference value, and money laundering.
- No national central bank, in particular the ECB, has any business holding or accepting any bitcoin-type cryptocurrencies. Central banks deal only with currencies.
- The ECB and the SSM are happy to oversee cryptocurrencies to be issued under the new regime (proposed Commission legislation / directive) but in no case to oversee bitcoin or currency and cryptocurrency transactions, respectively.
- Yes to modernisation, digitisation, direct payments and capital transfers, as well as to the protection of personal data, even to legislation allowing the issuance of cryptocurrencies, as long as it is governed by all its rules, legislation and supervision EU and the Eurozone.
The ECB is not opposed to this, in order to limit the uncontrolled and regulated cryptocurrencies. However, it has considerable reservations about both technical and legal, monetary and financial stability, calling for a greater, more careful and in-depth, examination of the issue.
It is recalled that the ECB recently completed the public consultation on its proposal to create the digital euro, which will be a currency, but in digital form, will have the same value as the euro, but will have less circulation and different interest rates. It will be a means of paying for direct debits and capital movements will contribute to the new digital age and change in consumer behaviour, will maintain anonymity except in cases controlled by criminal activity, will be controlled by the ECB and will not be a means of investment. However, it can be a reserve currency to some extent. Finally, it will circulate in parallel with the physical euro in a way that will not cause capital movements from the physical euro to the digital one, and it will not be a crypto currency.
Decisions on whether and when the digital euro will be released will be taken in the spring-summer of 2021. It is recalled that the relevant plan, was the result of cooperation with all national banks of the Eurozone, major central third-party banks countries, such as Canada, USA and Britain, but also special technological and international organisations such as the World Bank, the IMF, the Bank for International Settlements, etc.
Indirectly, Ms Lagarde gives the impression that it is a good idea to regulate cryptocurrencies in the Eurozone, but the issue is not so simple as can be described in a proposal for a 168-page Commission directive, sent on 18 and 30 November 2020 to the ECB.