Cryptocurrencies could survive even if the early market leaders fail and they could become useful in time, but regulators must keep a close watch on them to mitigate risks, European Central Bank Executive Board member Yves Mersch said Thursday.
"Virtual currencies are not money, nor will they be for the foreseeable future," Mersch said at an event in London. "Their market share is still small and their ties to the real economy are still limited."
However, this situation can change and regulators and legislators on all levels should therefore urgently pay close attention to mitigating the potential risks that could stem from their growth, Mersch added.
Further, he said any virtual currency business of banks must be "rigorously supervised" and they must not accept cryptocurrencies as collateral or accept them with sufficient haircuts.
Banks must also ensure that they have proper protocols in place to meet obligations under anti-money laundering and counter-terrorism financing regulations.
The policymaker said new innovations tend to generate euphoria and hype, which in turn fuel bubbles that eventually burst.
"And indeed, the hot air is already escaping from some of these bubbles," Mersch said.
"But just because the initial euphoria and hype subsequently fade, it does not mean that the innovation is without virtue, even if early market leaders may not last the distance."
The technology may in time become widespread and useful, but early versions of it may fade from view, he added.
According to Mersch, there was currently no convincing motivation for the ECB to issue a virtual currency to the general public.
In an interview to Bloomberg, Mersch sought a clear distinction between virtual currencies that are not backed by anyone, and fiat currencies that are legal tender and backed by whole economies.
"If you increasingly have bridges between the virtual world and the real world and then there is a collapse in this virtual world, it could drain liquidity from the real world," Mersch said in the interview, the text of which was put up on the ECB website.
"This then becomes a concern for the central bank." The ECB is also more concerned about the social and psychological effect digital currencies seem to have on the real economy, he added.
by RTT Staff Writer
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