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May 14, 2018

Yves Mersch of ECB spoke at the 39th meeting of the Governor’s Club Bodrum in Turkey. He discussed the appropriateness of virtual currencies as money, outlined the potential impact of virtual currencies, and talked about regulating the use of virtual currencies in the context of banks, financial market infrastructures (FMIs), and anti-money laundering and combating the financing of terrorism (AML/CFT).

He said he is "very skeptical" toward the use of blockchain and Distributed Ledger Technologies to create currency, while highlighting that virtual currencies are still not legitimized by any authority. Virtual currencies rely on financial intermediation via exchanges and wallet providers to re-enter the real economy, he added. He mentioned that money is a medium of exchange, acts as a unit of account, and is a store of value. However, it is clear that virtual currencies currently do not fulfill these three basic functions of money: they are inefficient media of exchange, poor stores of value, and are not used as units of account. These failures make the label “currency” a misnomer. He highlighted that virtual currencies cannot be directly regulated or overseen in the absence of a centralized governance and legal framework. "We ultimately need global answers in the absence of a defined jurisdiction for VC [virtual currency] issuance."

At a meeting this year in Buenos Aires, the G20 finance ministers and central bank governors acknowledged that technological innovation, including DLT and blockchain, had the potential to improve the efficiency and inclusiveness of the financial system. They warned, however, of the risks stemming from virtual currencies regarding consumer and investor protection, market integrity, tax evasion, money laundering, and terrorist financing. Ministers and governors, therefore, committed to extending global standards for combating money laundering and terrorist financing to virtual currencies; they called on international standard-setters to monitor virtual currencies closely and assess multilateral responses where needed. He added that virtual currency exchanges need to be held to the same rigorous standards as the rest of the financial system. For this purpose, the fifth Anti-Money Laundering Directive will bring virtual currency exchanges and wallet-providers within the scope of AML/CFT. However, a broader perspective on regulation in needed. Possible regulatory action to extend licensing and supervision rules to virtual currency facilitators could be explored.

He also examined whether virtual currencies could become a settlement asset in payment and settlement services or be used in the clearing domain. Existing standards for FMIs refer to the use of “a settlement asset with little or no credit and liquidity risk." While this appears to exclude settlement involving virtual currencies, such standards do not systematically apply to all FMIs. The situation is similar in the field of securities settlement. Use of a virtual currency as an asset for settling securities transactions or as a security depends on whether such currency could be legally characterized as a “financial instrument” under the applicable regulation. This depends on whether crypto-assets allow the identification of an issuer that can be held liable. The use of virtual currencies at central counterparties (CCPs) should also be monitored. The standards require CCPs to accept highly liquid collateral with minimal credit and market risk. While it is doubtful that a virtual currency would meet such a requirement, clear guidelines ex ante would be helpful. There is a need to examine whether any virtual currency activity by FMIs should have to be ring-fenced. Finally, in the banking sector, due to the high volatility of virtual currencies, it might seem appropriate to require any virtual currency trading to be backed by adequate levels of capital and segregated from other trading and investment activities. Given the risks posed by leverage, banks should not accept virtual currencies as collateral, or should only accept them with haircuts that appropriately reflect past volatility and liquidity, as well as market and operational risks. 

 

Related Link: Speech

Keywords: Europe, EU, Banking, Securities, PMI, Regtech, Virtual Currencies, Fintech, AML/CFT, ECB

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