European Central Bank: Cryptos Do Not Cause Financial Instability

Cryptocurrencies have for long been viewed as a threat to financial stability in the world. This is due to the fact that they are both assets and currencies (according to different investors) that are disrupting the centralized financial economy. Since they are prone to volatilities in bearish cycles, massive devaluation can trigger widespread economic hazards from Crypto-based wealth devaluation which can cause financial instability.

However, the European Central Bank (ECB) is refuting this notion in a publication that says that Digital Tokens have no impact of financial stability both in the Euro Zone and globally.

Basis Of The ECB Assumption

The real global economy is valued at about $80 trillion according to the CIA world factbook. On the other hand, the market capitalization of the more than 2,500 Cryptocurrencies is about $250 billion according to the Coinmarketcap data. Additionally, the daily volume of trade that can be used as a crude indicator of the velocity of Cryptos is about $85 billion dollars from various Crypto exchange charts.

Hence, the ECB, through official publishing dated Friday, May 17, 2019, argues that the proportion of the value of Cryptos in the whole financial system is relatively small to lead to any significant financial disruption that can rattle the global economy.

Additionally, the paper reveals that the Crypto-based economy is weakly linked to the mainstream financial sector and events in the former can not necessarily cause ripples in the latter.

Further, the ECB observes that the EU Zone banks do not hold a significant amount of Crypto assets. Hence a market instability in the case of a bearish cycle like that of 2018 cannot systematically affect the institutions in a way that is reminiscent of the 2008/9 financial crisis.

Cryptos Are Yet To Be Embraced As Money

The use of Cryptos is largely focused on investments as assets. Most investors in Crypto exchanges such as Binance, Kraken, Huobi, etc. are largely seen making sell and buy orders and they have a propensity to hodl Digital Tokens in anticipation of a bullish rally. Also, these investors promptly dispose of their Digital Assets ahead of a bearish run to avoid negative ROIs.

Because of the above factors, Cryptos have been accepted by a very low number of merchants as investors and risk-takers embrace them.

Notably, although there has been significant growth in the use of Cryptos as payment options, the low number of transaction volumes results in an insignificant tangible impact on the traditional economy.

The ECB’s Report Approves Of Stablecoins

As the Frankfurt-based Euro Zone bank makes its case that Crypto assets do not negatively impact the global financial economy, the report goes further to suggest that Stablecoins can be a tool of making Cryptos less volatile and more acceptable in the mainstream financial space.

Should the use of Stablecoins’ strategy of collateralizing fiat currencies grow, the monetary and Cryptosystems could be directly linked, demand for central bank reserves could surge, and monetary policies and implementations could be determined by Crypto market forces, the paper concludes.

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The ECB Is Open To The Exploration Of Digital Economies

Although the ECB president Mario Draghi is not keen on Cryptos, the ECB report shows that the bank is open to the idea of establishing Digital economies that are safe and risk-free.

Conclusively, the ECB is giving Cryptos a clean bill of health by asserting that they pose minimal threat to financial stability. This paper, therefore, has the potential to allure more investors to diversify their asset portfolios by buying Cryptos. Further, merchants can start accepting Cryptos to serve the growing Crypto users’ market niche.