The European Central Bank (ECB) said on Wednesday it aims to overhaul its monitoring of cryptocurrency trading activity by making improvements to both its on- and off-chain surveillance.
In a paper published on August 7 titled "Understanding the crypto-asset phenomenon, its risks and measurement issues", the central bank said that while the risks digital assets pose to issues such as financial stability and consumer safety are easily identifiable, there are currently too many gaps in the data available to determine exactly how much of a risk they pose.
The ECB said in the paper:
Important gaps and challenges remain: exposures of financial institutions to crypto-assets, interlinkages with the regulated financial sectors and payment transactions that include the use of layered protocols are all examples of domains with prominent data gaps.
The ECB identifies in the paper areas where cryptoassets may have an adverse impact on the stability and efficiency of the financial system and the economy. It adds:
While these risks are currently contained and/or manageable within the existing regulatory and oversight frameworks, links with the regulated financial sector may develop and increase over time and have future implications.
The extent to which the financial system and economy may be exposed to such risks will depend much on how the interconnectedness of cryptoassets with investment vehicles and retail payments develops: it noted specifically that cryptoasset derivatives connect investors with the digital asset market without them having to hold cryptocurrencies directly.
Closing the Gaps
The paper advised, therefore, that the ECB must prolong and improve its data collection on the growing asset class - refining both its qualitative and quantitative analysis. Problems arise, however, because:
Available data on crypto-assets are neither complete nor fully reliable for the purposes of monitoring market trends to the degree of detail necessary to gauge their risks.
Specifically, it said, it is hard to retrieve data on segments of the market that remain off radar such as illiquid trading platforms that may be affected by "wash trading" - a form of market manipulation that creates the illusion of robust trading activity.
A Call to Arms
The ECB said it is developing statistical initiatives along with the central banking community to help close the data gaps associated with cryptoassets. It added:
Looking ahead, the ECB will continue to work on indicators and data by dealing with the complexity and growing challenges encountered in analysing on-chain and layered protocol transactions.
Furthermore, it said, investigation will continue regarding new data sources for information on the finacial system's interlinkages with cryptoassets.
The report concluded:
With respect to the off-chain transactions, amid a multitude of methodological options, further work will focus on increasing the availability and transparency of the reported data and the methodologies used, harmonising and enriching the metadata and developing best practices for indicators on crypto-assets.