“Banks Should Segregate Any Cryptocurrency Business” Says European Central Bank Executive

News | May 16, 2018 By:

Yves Mersch, European Central Bank (ECB) executive board director, said that banks should “segregate” any business they do with cryptocurrencies and post “adequate” amounts of capital against it.

Speaking at the 39th meeting of the Governor’s Club Bodrum in Turkey, Mersch said cryptocurrencies issued by private companies with the help of users do not qualify as money and their issuers should be regulated.

“Due to the high volatility of cryptocurrencies, it might seem appropriate to require any cryptocurrency trading to be backed by adequate levels of capital and segregated from other trading and investment activities,” Mersch said. “Banks should not accept cryptocurrencies as collateral, or should only accept them with haircuts that appropriately reflect past volatility and liquidity, as well as market and operational risks.”

Mersch said that cryptocurrencies do not appear to pose significant financial stability risks at the moment. One reason is that they are small compared to the financial system as a whole. However, he said that if cryptocurrencies were to be used as collateral for bank loans or for settling trades at clearing houses, they could affect the stability of the wider financial system.

“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,” said Mersch.

Mersch called upon authorities to pay close attention to mitigating the potential risks that could stem from a growing crypto market.

“We have to be mindful not to have the complex and interlinked financial system contaminated by immature technologies or shallow business models,” said Mersch. “Interfaces and gatekeepers require particular scrutiny. Likewise, we should not succumb to the temptation to sacrifice the achievement of a level playing field for innovative advances that are aimed at regulatory arbitrage.”