The European Central Bank Crypto-Assets Task Force Occasional Paper on Crypto-Assets
By Jonathan Cardenas
In May 2019, the European Central Bank (“ECB”) Crypto-Assets Task Force (the “Task Force”) published an Occasional Paper on the potential risks posed by crypto-assets to financial stability, monetary policy and financial market infrastructures in the euro area. The Occasional Paper analyzes the extent to which current regulatory and financial oversight frameworks provide an adequate mechanism for the containment of risk posed by crypto-assets. This article provides a brief summary of the Task Force’s regulatory analysis and policy recommendations.
- Role of the ECB Crypto-Assets Task Force
The Task Force was established in March 2018 to monitor the development of crypto-assets and to assess the potential risk posed by crypto-assets to the stability of the European financial system, including the potential impact on European payment systems. The work of the Task Force is centered around three pillars: (1) the characterization of crypto-assets and related activities, (2) the monitoring of crypto-assets and related activities, including monitoring of channels that could potentially transmit crypto-asset risk to the euro area and European economy at large, and (3) the identification of potential control measures to mitigate risks posed by crypto-assets. The Task Force’s overall objective is to contain any adverse impact of crypto-assets on the use of the euro, European monetary policy and the stability of the European Union (“EU”) financial system as a whole.
The Task Force’s analysis serves as a basis for ECB contributions to regulatory policy discussions with the European System of Central Banks, the EU institutions, EU Member State financial regulatory authorities, and internationally. It also complements work on crypto-assets already undertaken by other financial sector authorities around the world, including the G7, G20 and Financial Stability Board, all of which are focused on crypto-asset implications for global financial stability.
- Occasional Paper Overview
The Occasional Paper provides a balanced look at the crypto-asset phenomenon, recognizing that crypto-assets pose risk with respect to money laundering, terrorism financing and consumer protection, while also acknowledging that the distributed ledger technology that underpins crypto-assets could potentially increase the efficiency of financial intermediation and of the financial system as a whole. In the Occasional Paper, the Task Force offers a characterization of crypto-assets which forms the basis of its analysis; it describes trends linking crypto-assets to financial markets; it assesses the potential impact of crypto-assets on European monetary policy and financial stability; and, it identifies gaps in crypto-asset regulation.
III. Characterization of Crypto-Assets
The Task Force recognizes that there is currently no international consensus on how to define a crypto-asset. With this in mind, the Task Force defines a crypto-asset for purposes of its analysis as “a new type of asset recorded in digital form and enabled by the use of cryptography that is not and does not represent a financial claim on, or a liability of, any identifiable entity.” In characterizing crypto-assets, the Task Force creates a distinction between what it refers to as the “infrastructure layer” and “asset layer” of a crypto-asset. The infrastructure layer is comprised of the software that underpins crypto-assets, namely distributed ledger technology. With respect to the asset layer, the Task Force describes this layer as the “sole focus” of its analysis and acknowledges that although crypto-assets “derive their novelty and specific risk profile, particularly their inherent high volatility, from the absence of an underlying fundamental value,” crypto-assets can be considered valuable by crypto-asset users as an investment and/or means of exchange, and could therefore be considered an asset.
- Trends Linking Crypto-Assets to Financial Markets
According to data gathered by the Task Force, an important share of bitcoin trading volume is settled in euro, implying that the euro area’s exposure to crypto-assets is “non-negligible.” However, the Task Force states that there are no indications that banks have systemically-relevant holdings of crypto-assets at the present time. The combined indirect exposure of banks to crypto-assets via exchange-traded notes and contracts for differences, for example, did not exceed 20,000 EUR at the end of Q3 2018. Notwithstanding the fact that current links between crypto-assets and the traditional financial sector are limited, the Task Force recognizes that these links could increase in the future as a result of recent market trends including the growth of futures contracts linked to bitcoin prices, as well as strong hedge fund and asset manager interest in crypto-asset based products. The Task Force states that euro area financial stability concerns could potentially arise in the future should the financial sector’s exposure to crypto-assets increase as a result of these developments.
- Financial Risk Assessment
- Monetary Policy
According to the Task Force, crypto-assets do not currently have a significant impact on monetary policy because they do not fulfill the traditional functions of money. The Task Force predicts that it will be difficult for crypto-assets to fulfill the traditional functions of money in the near future due to (1) the high price volatility of crypto-assets, (2) the absence of central bank backing of crypto-assets, and (3) the reportedly low number of merchants that allow goods and services to be purchased with crypto-assets, which collectively prevent crypto-assets from being used as substitutes for cash and deposits. Should crypto-assets become more widely adopted and serve as a credible substitute for cash and deposits in the future, monetary policy implications could potentially materialize.
- Financial Stability
The Task Force also states that crypto-assets do not currently pose a material risk to the financial stability of the euro area because their combined value is small relative to the overall size of the financial system. Nevertheless, the Task Force recognizes that there is currently no adequate means from a prudential regulation standpoint by which to address future crypto-asset risk. As such, this gap in prudential regulation should be filled at the present time while crypto-assets do not pose systemic risk. Clarifying how crypto-assets are treated under accounting rules would provide one step forward in this direction.
- Regulatory Gap Analysis
The Task Force recognizes that there is no international consensus at present as to how crypto-assets should be regulated. Given the global reach of the crypto-asset phenomenon, however, inconsistent and uncoordinated regulatory approaches could lead to ineffective regulation and provide incentives for regulatory arbitrage. The Task Force suggests that EU level regulation of crypto-asset gatekeeping businesses, such as crypto-asset custody and trading/exchange services, could allow crypto-asset risk to be addressed at the points at which crypto-assets enter the financial system and could thereby help to avoid “disjointed regulatory initiatives” at the EU Member State level. The Task Force also makes clear, however, that regulation of crypto-asset gatekeepers could have unintended negative consequences for the financial system by unintentionally creating a perception that crypto-asset businesses are legitimate.
The Task Force concludes that the current the level of risk associated with crypto-assets is “limited and/or manageable” and that crypto-assets do not “currently pose an immediate threat” to the financial stability of the euro area. Since crypto-assets could become more deeply integrated in the European financial system in the future, however, the crypto-asset sector requires careful monitoring of potential future risks that crypto-assets could transmit to the European financial system. In this regard, it is important that the ECB continue to monitor the crypto-asset phenomenon and develop preparedness for future adverse scenarios in cooperation with other financial sector authorities in Europe and around the world.
 European Central Bank Crypto-Assets Task Force, “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures,” Occasional Paper Series No. 223, May 2019. Available at: https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op223~3ce14e986c.en.pdf
 Id. at p. 3.
 Id. at p. 6.
 Id. at p. 6.
 Id. at p. 3.
 Id. at p. 15.
 Id. at p. 18.
 See Yves Mersch, “Virtual or virtueless? The evolution of money in the digital age,” Official Monetary and Financial Institutions Forum, 8 February 2018. Available at: https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180208.en.html.
 ECB Crypto-Assets Task Force Occasional Paper No. 223 (May 2019) at p. 4.
 Id. at p. 31.
 Id. at p. 3.