Luxembourg University explores interface between central banks and cryptocurrencies

Researchers,  Hossein Nabilou  and  Andre Prum from  Luxembourg University’s Faculty of Banking and Finance have recently published a paper on Central Banks and regulation of cryptocurrencies. The report was published on July 17th 2019. The paper focuses on European Central Bank and identifies the potential threats that the rise of cryptocurrencies would pose to the basic and ancillary tasks of the ECB, in particular, its monetary policy operations and the exercise of its supervisory functions over credit institutions and payment systems.

The paper finds that cryptocurrencies can potentially have both direct – through their potential impact on the price stability and monetary policy, and central banks’ monopoly over issuing base money – and indirect effects on central banks, mainly through the institutions and systems that fall under the ECB’s scope of competence.

To address the challenges posed by cryptocurrencies, the ECB may take both legal (including supervisory and oversight) measures and non-legal (or technical) measures. With respect to technical measures, the ECB – to the extent falling within the scope of its competence – may focus on improving the efficiency of existing payment systems and addressing the existing frictions in market infrastructures to indirectly affect the cryptocurrency markets.

Alternatively, it can venture into issuing Central Bank Digital Currency (CBDC). Regarding legal measures, central banks could envisage regulating cryptocurrencies either directly or indirectly. However, as the most significant potential impact of cryptocurrencies on central banks is likely to be indirect through the impact of cryptocurrencies on the banking and payment systems, and given the limitations on the ECB’s mandate and its regulatory and supervisory tools, it is apposite for the ECB to consider using indirect strategies and tools to influence cryptocurrency markets.

This indirect approach can be implemented through the ECB’s existing supervisory and oversight powers over the banking and payment systems.

This paper specifies the direct and indirect measures and assesses their merits in addressing the concerns about cryptocurrencies.

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