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European Central Bank Report Examines Growth In Virtual Currencies

Last Updated March 4, 2021 4:43 PM
Lester Coleman
Last Updated March 4, 2021 4:43 PM

The European Central Bank (ECB) has published a report on virtual currencies that recognizes their dramatic growth in recent years and analyzes some of their dynamics and challenges. Titled “Virtual currency schemes – a further analysis,” the 37-page report points out that virtual currencies have risks. However, it notes that currently, bitcoin is used for around 69,000 transactions per day worldwide, compared with a total of 274 million non-cash retail payment transactions per day for the European Union alone.

The ECB’s 2012 report on virtual currency examined the extent to which virtual currency schemes (VCSs) might affect a central bank’s tasks in the areas of price stability, financial stability, and payment system stability.

The new report contains extensive analysis carried out by the central banks of the Eurosystem during 2014. The ECB intends to continue monitoring the volumes traded and exchange rate dynamics of the most important VCSs, as well as their links with the traditional financial sector.

No immediate risk

ecbThe acceptance of VCS for payments does not seem widespread, the report noted, although some prominent e-commerce merchants have announced that they would start accepting payments with bitcoin. Hence, ECB does not view VCSs as presenting significant risks to banking activities.

“Many schemes have appeared, and some have already disappeared again, but around 500 exist at the time of writing,” the report said.

“Bitcoin is used for around 69,000 transactions per day worldwide, compared with a total of 274 million non-cash retail payment transactions per day for the EU alone.”

The ECB reports there are around 500 decentralized VCSs now, marking a dramatic increase over the previous report.

The ECB cited the following disadvantages for VSCs: lack of transparency, clarity and continuity; dependency on IT; anonymity of the actors involved; high volatility; and lack of safeguards to protect users against these risks. Participation in VCS exposes users not only to payment system risks, but other risks. Users are exposed to exchange rate risk, to counterparty risk related to the anonymity of the payee, and to investment fraud risk related to a lack of transparency.

However, the ECB also noted the following VCS advantages perceived by users that could challenge more traditional payment systems; costs, global reach, anonymity of the payer and speed of settlement.

ECB identifies ecosystem actors

The VCS “ecosystem” consists mainly of specific, new categories of actors in the payments environment compared to traditional payment methods.

ECB identified the following VCS actors: inventors, issuers, miners, processing service providers, users, wallet providers, exchanges, trading platforms, and other parties not specific to the VCS environment. These include merchants, payment facilitators, software developers, computer hardware makers, and ATM manufacturers.

ECB analyzed several different business models that have emerged, including those based on storing units in centralized VCS and others based on access to a decentralized VCS wallet.

Much of the analysis addresses how risks associated with VCS can affect central bankers’ tasks, such as monetary policy, price stability, financial stability, supervision and the operation of payment systems.

The ECB does not see the need to amend or expand the current EU legal framework related to these tasks.

National government reactions vary

The reactions from national authorities to VCSs vary. Responses range from warnings about risks, statements and clarifications on the legal status, licensing and supervision of VCS-related activities, or banning the activities.

Because the use of VCS for payments remains limited for now, the ECB does not see VCS as a major risk. However, a major incident with VCS could also undermine users’ confidence in electronic payment instruments, in e-money and/or in specific payment solutions.

The ECB recognizes that, besides drawbacks and disadvantages, VCS could have advantages over traditional payment methods. It specifically cites payments within virtual communities/closed-loop environments and for cross-border payments.

“Therefore, the Eurosystem will continue monitoring developments, notably for payments-related aspects of VCS,” the report said.

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