ECB Top Executive Wants Banks to Segregate Cryptocurrency Business

Board member Yves Mersch says virtual currencies are ‘clearly not suitable for use as money’.

by Marin Marinov
16 May • 6 min
In Regulation

Banks should separate their cryptocurrency business from other operations because of the ‘wild fluctuations’ of digital coins, Executive Board member of the European Central Bank (ECB), Yves Mersch, said at a conference in Turkey on Monday. Mersch, outlined ECB's vision on cryptocurrency using the term ‘virtual currency’ (VC) and empathizing several times that cryptocurrencies are not money.

“Due to the high volatility of VCs it might seem appropriate to require any VC trading to be backed by adequate levels of capital, and segregated from other trading and investment activities,” Mersch said at the annual meeting of the central bank governors from Central Asia, the Black Sea Region and Balkan Countries in Bodrum.

Cryptocurrency and collateral

Mersch, who is responsible for banknotes, legal services, market Infrastructure, payments and risk management, called for limitations on the use of cryptocurrency as collateral:

“Given the risks posed by leverage, banks should not accept VCs as collateral, or should only accept them with haircuts that appropriately reflect past volatility and liquidity, as well as market and operational risks. Likewise, limits on leverage could be examined,”.

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European Central Bank Headquarters, Frankfurt, Germany/Source: © European Union, 2018

“If VCs were indeed used as collateral for loans, a fall in the value of such collateral could lead to margin calls and increased defaults, with knock-on effects on borrowing and economic activity,” he explained.

‘Clearly not suitable for use as money’

In Bodrum, Mersch revealed his vision why cryptocurrencies are not money and will not become in the near future explaining that VCs do not fulfill the three basic functions of money as they are inefficient  media of exchange, poor stores of value and not used as units of account. The ECB executive is also opposed to the so-called central bank digital currency (CBDC).

The market of digital coins is relatively small with a capitalization of USD 432 billion in early 2018, about 1.5% of the market capitalization of the S&P500, Mersch added stating that the general public does not view VCs as money because there are around 200 000 Bitcoin (BTC) transactions globally per day, compared with 330 million retail payments in the Eurozone alone.

“Transactions generally require confirmation from six miners, which can take an hour, or potentially much longer due to network congestion. Bitcoin payments are also expensive: and even if recent claims put the price at between EUR 1 and EUR 30 and the processing time at under ten minutes, this compares poorly to 0.2 euro cents and a maximum of ten seconds for transactions on the forthcoming TARGET Instant Payment Settlement (TIPS) service,” Yves Mersch told in his report in Bodrum.

‘Inherently risky’

Although the cryptocurrency market is relatively small, its ‘wild fluctuations of value’ and significant rise in recent months can become a future problem:

“Amid such potential risks, resolute ring-fencing measures may be needed to safeguard the integrity of financial sector services, protect investors and consumers, and prevent negative spill-overs to the real economy,” Mersch concluded.

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Yves Mersch, Member of the European Central Bank Executive Board/Source: © European Union, 2018

The ECB executive endorsed G20 calling for anti-money laundering (AML) and counter-terrorist financing (CTF) standards for cryptocurrency but appealed for special global attention on four key areas: VCs themselves, the facilitators – crypto exchanges, wallet-providers and brokers, financial market infrastructures (FMIs) and the banking sector.

The ECB Executive Board has six members, including President Mario Draghi. The Board, which is responsible for the daily operations of ECB, is also part of the Governing Council meeting, the main-policy making body in the Eurozone.

Recently, the European Union (EU) adopted AML rules for cryptocurrency exchanges after consultations with member states and EU institutions, including the Executive Board of ECB.