Similarly, firms cannot rely on crypto-assets as a unit of account for the calculation of prices or for their balance sheet. And this is just as true for stablecoins, given the poor consumer protection and the vulnerability to panic selling that characterise them in the absence of appropriate regulation and supervision.
When adequately regulated and supervised, stablecoins are nothing more than e-money arrangements. This is something we have known for many years. But do they at least perform other worthwhile social or economic functions, such as funding consumption or investment, or helping to combat climate change? There is reason to believe that they do the exact opposite.
Crypto-assets are widely used for criminal and terrorist activities. It is estimated that the amounts of crypto-assets exchanged for criminal purposes are substantial, exceeding USD 24 billion in Crypto-assets may also be used for tax evasion or to circumvent sanctions.
For example, North Korea has actively tried to recruit cryptocurrency experts over the past few years. They are created in a decentralised mining process which consumes an enormous amount of energy and computing hardware. It is estimated that mining in the bitcoin network uses up about 0. And even where crypto mining uses clean energy or less energy-intensive techniques, this is energy that is not available for other purposes, increasing the consumption of fossil fuels and impeding the fight against climate change.
So crypto-assets are speculative assets that can cause major damage to society. At present they derive their value mainly from greed, they rely on the greed of others and the hope that the scheme continues unhindered. Until this house of cards collapses, leaving people buried under their losses.
Crypto-assets and financial stability risks Let me now turn to the risks that crypto-assets pose to financial stability. But, as I mentioned, they already have a larger market than sub-prime mortgages had before the global financial crisis started. We cannot afford to ignore them. Indeed, the popularity of crypto-assets is spreading beyond their core supporters. The launch of the first bitcoin exchange-traded fund in the United States last October is a sign of increased institutional activity in these assets, largely in response to demand from customers.
First, stress in crypto-asset markets could spill over to players in the wider financial system through direct asset holdings or ownership of service providers. One measure of such linkages is the correlation between changes in the prices of crypto-assets and of equities, which has been positive since Third, a loss of faith in the value of crypto-assets — for instance because of operational failures, fraud, price manipulation or cybercrime — could lead to a sharp deterioration in investor confidence,[ 31 ] which could spill over to broader financial markets.
Linkages through these three channels are as yet still limited. But they could increase rapidly if crypto-assets are widely adopted by institutional or retail investors. Such a scenario is not far-fetched. For example, high-net-worth investors, financial advisors and family offices are now leading the charge to invest in crypto-assets. In a stress situation, a sudden surge in redemptions by stablecoin holders could lead to instability in various market segments.
Such extreme scenarios might not be just around the corner. But the longer we wait, the more exposures and vested interests build up. And the harder it will be for policymakers to act. Regulating crypto-assets This brings me to the issue of regulation. Policymakers should not allow crypto-assets and the associated risks to proliferate unchecked. We must decide how to regulate them, following a rigorous risk-based approach tailored to different instruments.
Some countries have banned crypto-assets outright while others have restricted their use. We need globally coordinated regulatory action to address issues such as the use of crypto-assets in cross-border illicit activities or their environmental footprint.
Regulation should balance the risks and benefits so as not to stifle innovation that could stimulate efficiency in payments and broader applications of these technologies. Progress is being made in Europe and worldwide, but not swiftly enough to keep pace with the emerging challenges.
We need to see faster progress on many fronts. Four of these are particularly relevant. First, we need to hold crypto-assets to the same standards as the rest of the financial system. This means swiftly implementing all rules to prevent the use of crypto-assets for money laundering and terrorist financing, based on the standards set by the Financial Action Task Force FATF , and enforcing them effectively.
Second, we should consider how to adequately tax crypto-assets. Currently the tax treatment of crypto-assets is minimal: we know very little about who really owns them, and about the size[ 39 ] and the distribution of the capital gains. By its very nature, the crypto-asset market makes it very difficult to identify tax-relevant activities because it relies less on traditional financial intermediaries, who typically provide information for tax purposes.
The introduction of reporting obligations for transactions above certain thresholds, as just recently proposed by the Organisation for Economic Co-operation and Development OECD , would enhance transparency and combat tax evasion. Negative externalities that lead to sunk costs for society, such as high pollution, could be factored into appropriate taxes levied on participants in crypto markets issuers, investors and service providers.
Third, public disclosure and regulatory reporting need to be strengthened. The current practice observed in the crypto industry — for example, the disclosure of reserve assets backing stablecoins — is highly problematic. At the same time, public authorities central banks, supervisors and AML authorities need to further improve their data capabilities in order to detect illicit trades and emerging threats to financial stability.
Fourth, given the crucial unanswered questions on issues such as operational risk, volatility and liquidity, regulators should introduce strict transparency requirements and set out the standards of conduct to be followed by professional operators in order to protect unexperienced retail crypto-asset investors.
Europe is leading the way in bringing crypto-assets into the regulatory purview. Moreover, the proposed Regulation on information accompanying transfers of funds and certain crypto-assets FCTR will aim to ensure that crypto-asset transfers which include at least one crypto-asset service provider can be traced and that suspicious transactions can be blocked.
Swift negotiations by the European Commission, European Parliament and the Council of the European Union, together with thorough enforcement by competent national authorities, are necessary given the rapid growth of the crypto market. Europe's regulatory measures need to go further. We need to focus more on unbacked crypto-asset activities that are undertaken without service providers. In addition, we cannot afford to leave on-chain peer-to-peer payments unregulated, as they can be used to circumvent any regulation.
Finally, if we really want to harmonise supervision significantly across all EU Member States, the new European AML Authority should supervise the riskiest crypto-asset providers. But our measures can only be effective if they are matched by ambitious measures implemented by our international peers. The westward expansion of the United States in the second half of the 19th century broadly coincided with a period when some states passed free banking laws which eased the requirements for opening a bank, facilitating the emergence of so-called wildcat banks.
Many of them defaulted, undermining public confidence in banks. We should not permit such a situation to happen again in the digital arena with crypto-assets. We need to make coordinated efforts at the global level to bring crypto-assets into the regulatory purview. Furthermore, there needs to be regulatory clarity that promotes web3 innovation, protects consumers, and improves financial inclusion.
An important and unique aspect of web3 is that it uses technology to support and reward direct community engagement and action. The Crypto Sustainability Coalition is a public-private initiative hosted by the World Economic Forum and comprises 30 partners. For example, the decentralized nature of crypto-mining and its ability to operate at off-peak times may provide a new business model for utilities and investors looking to develop renewable energy microgrids.
The Crypto Sustainability Coalition will investigate, collate and highlight industry standards, best practices and examples of tangible action that attest to how web3 technologies can support communities most vulnerable to the impacts of climate change.
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