Cryptocurrency is going mainstream. Just think back to the Super Bowl ads. More and more investors – including many young people – are dabbling in the crypto marketplace, lured in by social media, promises of high returns and the prospect of building a new, open and innovative financial system. But investments in volatile digital currencies can be risky.
The Executive Order signed by President Biden on March 9 charts the way for U.S. regulation of crypto assets. The European Union (EU) is in the final stages of introducing comprehensive rules for crypto-assets. But crypto is global and our approach needs to be global, too.
I believe that the EU and the U.S. can together lead the way on a shared international approach to regulating crypto. Together, we can enable innovation in finance, while protecting consumers and maintaining financial stability.
The crypto ecosystem and the technology that underpins it could bring great benefits to the world. Blockchain technology essentially removes the need for centralized processes and intermediaries. It cuts out the middleman. It can make transactions more efficient and transparent, too, by recording key information in an unchangeable format, making it accessible to all market participants. This has the potential to make payments cheaper, faster and safer. It could also unlock the billions of euros and dollars currently used to cover credit or settlement risk in the financial system.
Still, we should not underestimate the significant risks that crypto poses. We need not look too far into the past to see the harm that financial innovation can cause without the right regulation and supervision in place.
With unregulated crypto, consumers run the risk of buying into unsuitable products, relying on incomplete information. Investors risk losing money because of fraud, deception or simply the volatility that has characterized crypto markets since their inception.
We also need to ensure market integrity and make sure rules against market abuse such as insider trading are enforced.
Recent discussions have highlighted the potential for crypto to circumvent sanctions, and the same applies for money laundering or the financing of terrorism. The EU is clear that our sanctions on Russia for its aggression in Ukraine cover crypto, but enforcement is key, and authorities need to remain vigilant.
Nor can we ignore the high energy consumption and environmental impact of crypto. That is why the EU already funds initiatives to make blockchain more sustainable. Crypto presents risks for financial stability as well. These risks are not yet systemic but, as the Financial Stability Board warned recently, they do require careful monitoring and regulation.
The EU is one of the first major jurisdictions to put forward comprehensive regulation for crypto-assets. Our Markets in Crypto-Assets (MiCA) proposal aims to bring crypto fully into the regulated space. MiCA promotes responsible innovation, provides legal certainty and addresses the risks to financial stability, consumers and market integrity. We are also including the crypto ecosystem in our money laundering rules.
At the same time, central banks worldwide are investigating the possibility of issuing central bank digital currencies. The European Central Bank launched an assessment of the idea of a digital euro in July 2021, and we stand ready to propose the necessary legislation.
But to make rules on crypto fully effective, crypto requires global coordination and joint international principles.
A global agreement on crypto should first enshrine that no product remains unregulated. Second, supervisors should collect and exchange information globally. Third, any agreement must protect retail investors. Fourth, the crypto ecosystem should fully integrate environmental considerations.
The EU and the U.S. can lead the way on regulating crypto. I call on the international community to accelerate the work done by the G20’s Financial Stability Board and sectoral standard setters, and move to agree to a global approach on crypto-assets. The G20 Finance Ministers and Central Bank Governors meeting of Feb. 17 and 18 is a first step.
We have no time to lose in managing this transformation for the benefit of investors, businesses and wider society.
Mairead McGuinness is commissioner for financial services, financial stability and capital markets union at the European Commission.