The ECB publishes three reports in an attempt to adopt the largest cryptocurrency law in Europe

The European Central Bank encourages countries to act quickly to regulate the digital asset space as the industry poses increasing threats to financial stability.

In three reports published on Monday, the ECB called on decision-makers and member states to adopt the Cryptocurrency Markets Act (MiCA), Europe’s first attempt at a comprehensive cryptocurrency policy, annulled in late June. The law must be “implemented soon”, the EU said in its report on stack coins.

MiCA will require stablecoin issuers to maintain ample reserves and regularly update disclosure documents. The new law will also address environmental concerns around crypto by allowing companies to report energy consumption and emissions.

Stablecoins specifically threaten financial stability due to their risk of infection. These types of digital assets, which either rely on reserves or algorithms to maintain value, have become an increasingly important part of the crypto industry, the ECB said.

“Recent developments show that stack coins are anything but stable, as exemplified by the crash of TerraUSD and the temporary de-pegging of Tether,” the report noted.

TerraUSD (UST) was an experimental seigniorage system that failed in its algorithmic stability mechanism. It was fundamentally different from centralized stack coins like the USDC backed by US dollars and short-term government bonds. It also differs from decentralized stable coins such as DAI, which are overcoated – which means that users who borrow against their crypto can borrow less DAI than the value of their locked security.

U.S. lawmakers have also expressed concern about the legitimacy and stability of stack coins in the wake of UST’s depegging.

Finance Minister Janet Yellen and a number of prominent politicians at the federal level have called on regulators to treat stack coins and similar digital assets as banks – something industry participants have rejected.

“We have just had this past week with Terra and with Tether an illustration of the risks associated with stack coins … it could be races,” Yellen said during a congressional hearing in May.

Like the United States, ECB officials urge decision-makers to take an international approach to digital asset regulation, especially as technology continues to cross borders.

“When vulnerabilities begin to build, an internationally coordinated approach is needed to reduce DeFi risks before they pose a risk to financial stability,” the ECB wrote in its DeFi report. “To date, interconnections with the traditional financial sector have been limited, but they have the potential to grow rapidly given institutional interest.”

Earlier this month, in the first of many expected digital asset reports following President Biden’s executive order, a group of U.S. regulators called on the federal government to work with other nations on cryptocurrency policy.

The United States continues to work on the G20 roadmap to address challenges and frictions with cross-border payments, including improvements to existing systems, potential barriers to data localization and other frictions in data management frameworks, the international dimensions of CBDC design, and the potential for well-regulated stack coin- events, says a statement from the US Treasury Department.

The ECB has also published a report on the environmental impact of cryptocurrencies, particularly with regard to carbon emissions related to mining tokens such as bitcoin and ether.

“It is highly unlikely that the EU authorities will restrict or ban fossil fuel cars by 2035 (as currently assumed), but refrain from implementing measures for assets whose current annual carbon emissions are enough to undo most eurozone countries’ past and target greenhouse gas emissions savings, as well. as the current and future global net savings from the deployment of electric vehicles, »noted the climate report.

There is no consensus on the overall environmental impact of bitcoin mining. For example, some applications are expected to reduce greenhouse gas emissions by using flared natural gas that would otherwise have been released into the atmosphere.

Ethereum plans to end proof-of-work mining as soon as September, which is expected to reduce the energy associated with ether emissions by around 99.9%

In any case, the speed with which the ECB hopes to adopt policy is a concern for some industry members.

“A ban on mining is not necessarily a bad thing, as long as the ecosystem has time to prepare,” said Guilhem Chaumont, CEO and co-founder of Flowdesk, a French market-creating and institutional compliance company. “Here we are talking about regulation that will be enforced in a minimum of four years, but there are many ongoing initiatives regarding the transition from Ethereum to proof of effort, and things like this.”

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