The European Central Bank (ECB) presented a new report recently, which explores the crypto financial risks in detail and urges ‘appropriate’ oversight and regulation of decentralized finance (DeFi) and stablecoins. Moreover, the report has also discussed the hot topic of the carbon footprint of Bitcoin in Europe, suggesting that it is probable that a ban on proof-of-work (PoW) mining will be imposed.

Supervision and regulation

The ECB recently issued the Macroprudential Bulletin and its latest edition talks about the crypto financial risks, particularly those associated with decentralized finance (DeFi) and stablecoins. It has also talked about the energy-intensive crypto mining methods as they are against the climate transition goals of the continent.

Presight Capital’s crypto venture advisor, Patrick Hansen highlighted the key moments that were published in the said report. The authors of the paper explored the implications of the policy of these crypto market segments. They insist that the widespread growth and use of stablecoins globally make it essential to introduce oversight, supervisory and regulatory frameworks immediately like the MiCA (Markets in Crypto Assets).

This is essential before the traditional financial system and digital currencies become even more interconnected.

Stablecoin issues

The bullet comprised of three articles and one of them was focused on the key role stablecoins are playing in the crypto ecosystem. According to the experts of the ECB, the crucial function of stablecoins can have a contagion effect on the traditional financial system. The financial stability could be at risk in the future because of these unbacked crypto assets.

The UST stablecoin collapse in May is an excellent example of this situation and experts said that these developments show that stablecoins are not really stable. Initially, they had only been introduced as a relatively safe ‘parking space’, but their use cases have increased recently. This is particularly true after the rise of DeFi applications that have also expanded quite rapidly in the past year.

DeFi platforms

The ECB acknowledged that DeFi platforms are different in some aspects like how they hold assets and employ innovation enabled by technology. But, the monetary authority said that they do not provide any such unique financial products. Instead, it said that they simply mimic the ones that are already offered by traditional financial institutions.

The central bank said that in many ways, the world of decentralized finance is vulnerable to the same risks as those faced in traditional finance. The bank said that even though these platforms came to have a decentralized governance structure, this is not true. This is because reality shows that the structure is actually concentrated.

According to the ECB, it is essential to make efforts for effectively supervise the decentralized finance ecosystem, even though its anonymous and decentralized nature does present some challenges. This would obviously make things harder for regulatory authorities and policymakers. The European Central Bank (ECB) has asserted that a coordinated approach is required internationally in order to develop common standards that can be used to identify and then fill the gaps in regulation.