A recent macroprudential review published by the European Central Bank illustrates the concerns that exist in Europe regarding cryptocurrencies. The role of stablecoins, the environmental risks of Proof-of-Work consensus, and the topic of decentralized finance are just a few of the subjects covered in the document.
Crypto’s environmental implications
Currently, the state authorities of the European Union must decide whether to support a PoS consensus, which is referred to as the crypto-version of electric cars, or to concentrate efforts on restricting or outlawing PoW, which is compared to conventional cars. This decision is analogous to the situation in the automotive industry.
The analogy is applicable, as most countries’ emissions savings and the global net savings from encouraging the switch to electric vehicles have already been eliminated by PoW crypto assets.
Government officials may therefore choose to take “no action,” though this is unlikely. However, political action by the authorities—whether it be through disclosure requirements, a carbon tax on cryptocurrency ownership or transactions, or a complete ban on mining—is a more practical choice.
The ECB has paid particular attention to the DeFi market segment of cryptocurrencies and questioned its decentralization claims. The regulator used the holding structure of Uniswap as an example when stating that because any DeFi protocol requires human involvement, the concentration of the majority of token offerings in the hands of a small number of individuals, could result in all holders, DAOs, and DeFi project teams being subject to regulation.
Safety and sustainability of stablecoins
Additionally, stablecoins have not gone unnoticed. The regulator claims that as the DeFi industry developed, stablecoins—originally intended as a parking lot for crypto liquidity—became more complex in their applications and forms and, as a result, lost any semblance of stability. According to the ECB, things have advanced to the point where the very definition of “stable” has been altered. Even algorithmic stablecoins are now regarded as secured, despite the fact that they lack collateral.
In order to prevent a recurrence of the Terra and UST case and the entire crypto market in general, the regulator demanded urgent regulation of the stablecoins market at the conclusion of its manifesto-review.