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Cryptoassets

Context

Cryptoassets are a digital representation of value or contractual rights that can be transferred, stored or traded electronically and which typically use distributed ledger technology (DLT) secured by cryptography or similar technologies. Cryptoassets mainly include two categories of assets: unbacked cryptoassets and cryptocurrencies, such as Bitcoin and Ether, that have no underlying asset and no intrinsic value and stablecoins, such as Thether, that hold backing assets intended to stabilise their value against existing fiat currencies and use mechanisms to stabilise their value. Central Bank Digital Currencies would be a particular type of stablecoin issued by a Central Bank. Various wholesale tokens providing their holders with interests or governance rights on blockchain platforms also exist, although they normally fall in one of the two previous categories.

The global market for cryptoassets has grown rapidly in recent years peaking at $2.9 trillion in November 2021 and then experiencing a fall back at the beginning of 2022, which corresponds to around 0.4% of global financial assets. Currently the majority of cryptoasset activity is driven by the use of volatile unbacked cryptoassets, representing around 90% of the total cryptoasset market capitalisation, used as speculative investment assets. In addition to direct investment in cryptoassets facilitated by cryptoexchanges or similar platforms, new means of gaining exposure to cryptoassets are emerging, such as cryptoasset derivatives or ETFs and cryptoasset lending. Regulators consider that the price volatility of unbacked cryptoassets makes them unsuitable to be widely used as money or store of value, but stablecoins may have greater potential to be used in payments.

Stablecoins also underpin a large part of the activity on centralised cryptoasset exchanges and decentralised finance (DeFi) applications, acting as a bridge between crypto platforms and traditional financial systems and being used for the payment of interest and as collateral.

While regulators acknowledge the opportunities represented by stablecoins in terms of potentially providing alternatives to traditional modes of payments and by the DLT and smart contract technology underlying cryptoassets in terms of cost reduction and speed (e.g. for cross-border transactions), the potential risks associated with cryptoasset activity have also been highlighted. These include the risks of illicitic activity, exposure to financial and operational risk and also potential financial stability and spillover risk if cryptoassets were to develop significantly in the future.

In the EU, the Markets in Cryptoassets (MiCA) regulation proposal aims at creating a harmonized legal framework for cryptoassets that are not covered by EU law, setting out definitions, autorisation requirements and rules for cryptoasset service providers and also consumer protection and AML prevention requirements. The legislative process is underway with the recent adoption of the ECON Committee report on MiCA.

Contributions to the policy debate

Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)

Public and private
sector view

DeFi finance: prospects and policy challenges - February 2022 new

Robert Ophèle - Autorité des Marchés Financiers | Iota Nassr - OECD | Jos Dijsselhof - SIX Group Services AG | Delphine d’Amarzit - Euronext | Swen Werner - State Street Bank and Trust