European Central Bank, the central bank for Europe and the entity that administers the monetary policy of the EU countries, released an occasional paper titled ‘Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructure.’

The bank stated on Twitter,

Occasional paper: Crypto-Assets – Implications for financial stability, monetary policy, and payments and market infrastructures https://t.co/3lFPhcbk1R

— European Central Bank (@ecb) May 17, 2019

Under the section ‘Potential implications for monetary policy,’ the bank stated that Bitcoin [BTC] and other cryptocurrencies currently do not “fulfill the functions of money.” It also stated that digital currencies do not pose a “tangible impact on the real economy” and that they do not have “significant implications for monetary policy.” However, the bank mentioned that this situation could change if cryptocurrencies were to be considered as “credible substitutes for cash and deposits.”

The report added that the low number of merchants using Bitcoin as a mode of payment for their goods and services acts as an indicator that the largest cryptocurrency has “no influence” on “price-setting at all.”

It further stated,

“The high volatility of crypto-assets, absence of central bank backing and the limited acceptance among merchants prevent crypto-assets from being currently used as substitutes for cash and deposits, as well as making it very difficult for crypto-assets to fulfill the characteristics of a monetary asset in the near future”

Additionally, the bank stated that Bitcoin [BTC] and other cryptocurrencies were not “effectively competing against cash and deposits,” remarking that its “implications for economic developments and monetary policy are similar to those of other asset markets.” The report explained the reason to be its limited “linkage to the wider financial system” and the small size of the cryptoverse.

Further, the report also expanded on stablecoins’ impact on monetary policy,

“In this regard, it remains to be seen whether algorithmic stablecoins can effectively offer the very substantial reduction in price volatility that a wider adoption would be likely to require. By contrast, stablecoins could become less volatile if the coins were collateralised by central bank reserves, for example.”

The bank went on to state that stablecoins backed by central bank reserves “could result in additional demand” for the said reserves, thereby having implications for monetary policy. The bank said, “however, such collateralised stablecoins are not crypto-assets.”

Source: European Central Bank | Twitter

On cryptocurrencies’ risk to financial stability, the bank stated,

Source: European Central Bank | Twitter

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