European Central Bank has very hawkish view on crypto; even DeFi holders can get regulated
The European Central Bank unveiled a fresh macroprudential review that paints a picture of Europe’s concerns about cryptocurrencies. The document touches on topics such as the role of stablecoins, the environmental risks of Proof-of-Work consensus and the area of decentralized finance.
Ecological issues of crypto
At the moment, the state authorities of the European Union face a choice similar to the situation in the automotive sector, whether to encourage a PoS consensus, which is assigned the role of the crypto-version of electric cars, or to focus efforts on limiting or banning PoW, which is compared to conventional cars.
The analogy is indeed relevant, as PoW crypto assets are already eliminating most countries’ emissions savings and the global net savings from incentivizing electric car transitions.
Thus, a “no action” approach by government officials is possible, but unlikely. Political action by the authorities, however, whether it be disclosure requirements, a carbon tax on crypto transactions or ownership, or an outright ban on mining is a more realistic option.
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DeFi dilemma
The DeFi segment of the cryptocurrency market has received special attention from the ECB, which questioned its real decentralization. Citing Uniswap’s holding structure as an example, the regulator stated that the concentration of most of the token offerings in the hands of a small number of people, and the fact that any DeFi protocol requires human involvement, could lead to all holders, DAOs and DeFi project teams falling under regulation.
“For instance, 80% of the total supply in circulation of Uniswap’s governance token UNI is held by the team, early investors and token holders with balances of over 1 million UNI. Further, 1% of the total token holder addresses hold around 97% of the total token supply.” pic.twitter.com/BqOHCVZEMi
— Patrick Hansen (@paddi_hansen) July 12, 2022
Stablecoins’ safety and sustainability
Stablecoins have not been overlooked either. The regulator has stated that as the DeFi sector has evolved, stablecoins, originally conceived as a parking lot for crypto liquidity, have become increasingly sophisticated in their uses and forms and, as a result, have lost any hint of stability at all. It has gotten to the point where the very notion of “stable” has been turned upside down and even algorithmic stablecoins are now considered secured, even though they have no collateral, the ECB stated.
At the end of its manifesto-review, the regulator called for urgent regulation of the stablecoins segment to avoid a repeat of the Terra and UST case, as well as the entire crypto market in general.