Having lost 26% of its value in the last month, Bitcoin and other cryptocurrencies are in danger of dragging the "real economy" with their unpredictable fluctuations.
In an interview on May 5th, Fabio Panetta, a member of the ECB's governing body, said that "the value of the crypto-asset market exceeds that of the sub-prime mortgage market that triggered the financial crisis".
"...those who will eventually choose the digital euro will be able to trust it as much as the cash in euros, as both of these forms will be of equal value and will be supported by the Eurosystem."
In a written interview, Christos Phanopoulos, Senior Director of the Banking Operations Division of the Central Bank of Cyprus, noted that cryptocurrencies are not issued nor are they guaranteed by any public authority, they do not have a legal status of currency or money and the operation of most of them is not subject to the control of a central body.
According to Mr. Phanopoulos, the main risks are related to the lack of a reliable supervisory/regulatory framework capable of offering legal protection to cryptocurrency holders, the anonymity and lack of transparency that usually surrounds cryptocurrency transactions, and to misleading or incomplete information from providers to consumers and investors.
In addition, weak governance structures and cybersecurity measures implemented by online platforms acting as cryptocurrency exchanges are at risk, with some collapsing and others being hacked. Finally, the high volatility of cryptocurrency values is dangerous, which in combination with the lack of liquidity and easy exit options from such transactions, can lead to large losses in the capital of cryptocurrency owners, he said.
Risks to the European and Cypriot economy
Phanopoulos, when asked whether the European economy can be affected by cryptocurrencies, noted that the upward trend recorded in this market and the high volatility recorded by the prices of cryptocurrencies in combination with the above risks, outline a potential risk for the European economy.
In 2018, the Financial Stability Report identified various channels through which financial stability and the economy, in general, can be affected. Among them is the impact on financial wealth and trust in general. The interconnection of the cryptocurrency market with the financial sector and payment systems is also a potential risk to the economy, he said, adding that it is worth noting that the above risks are additional unbalanced factors for the impact that it can have on the economy, especially in the event of a sharp and uncontrollable downward correction of prices.
Regarding Cyprus, he noted that at this stage there is no data on the exposure of the Cypriot economy to cryptocurrencies. Based on ECB data for 6 major economies, as published in the latest ECB Financial Stability Report, it appears that up to 10% of households hold cryptocurrencies.
Asked about the ECB's intention to issue a digital euro, Phanopoulos said the digital euro will increase public confidence in digital payments, clarifying that the digital euro will not replace cash in euros, but will work in addition to them.
He added that the Eurosystem is currently discussing what form the digital euro could take. The exploration phase, which began in October 2021, will last about two years and is expected to be completed in October 2023. It looks at how the digital euro could be designed and distributed to traders and the public, as well as its impact, and whether changes in European legislation may be needed.
The decision to create the digital euro will be taken after the conclusion of the investigative phase at the end of 2023, he clarified.
He stressed that the digital euro will not be equivalent to a cryptocurrency.
"Cryptocurrencies are essentially different from central bank money because their prices are often volatile, making them difficult to use as a means of payment or as a unit of measurement, and they are not backed by any government agency. For the same reason, they carry increased risk as an investment instrument", he noted.
On the contrary, those who will eventually choose the digital euro will be able to trust it as much as the cash in euros, as both of these forms will be of equal value and will be supported by the Eurosystem, he said.