Cryptocurrencies could damage EU economy

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Volatile, high-risk cryptocurrencies can cause harm to the European economy, argues a senior official at the Cyprus Central Bank.

Christos Phanopoulos, Senior Director of the banking operations at the Central Bank, told CNA that cryptocurrencies are not issued, are not guaranteed, have no legal status of currency and are not subject to the control of a central body.

He said the main risks are 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 misleading or incomplete information from providers.

Weak governance structures and cybersecurity measures implemented by online platforms acting as cryptocurrency exchanges are at risk, with some collapsing and others being hacked.

The high volatility of cryptocurrency values ​​is dangerous, which, combined 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.

Phanopoulos argued that the upward trend in this market and the high volatility of prices outline a potential risk for the European economy.

The interconnection of the cryptocurrency market with the financial sector and payment systems is also a potential risk to the economy, he said.

“It is worth noting that the above risks are additional unbalanced factors for the impact on the economy, especially in a sharp and uncontrollable downward correction of prices.”

He noted there is no data on the exposure of the Cypriot economy to cryptocurrencies.

Based on the ECB data for six major economies, it appears, however, that up to 10% of households hold cryptocurrencies.

Digital euro

Phanopoulos said the digital euro would increase public confidence in digital payments, clarifying that it will not replace cash but work in addition to it.

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, its impact, and whether changes in EU legislation may be needed.

He stressed that the digital euro would 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.

“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.”