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Librexit - the EU is cautious about cryptocurrencies

6 Dec 2019 15:07|Bartosz Grejner

The European Commission and the Council of Europe in a joint statement turned the red light on to stablecoin projects, i.e. cryptocurrencies which value depends on traditional assets such as dollars. Although the communication does not mention the name of Facebook or its stablecoin child Libra, the statement was triggered by this virtual currency," writes Bartosz Grejner, Market Analyst at Conotoxia.

In the announcement published on Thursday, we can find, among others, that "global ‘stablecoin’ projects and arrangements should not come into operation until all of these risks and concerns are properly addressed". This means that the concerns expressed by the US Congress a few months ago have also been transferred to the European Union.

Guardians of present financial order

The EU regulatory bodies stated that "these initiatives [stablecoins] should not undermine existing financial and monetary order as well as monetary sovereignty in the European Union". Like the US Congress, the EU institutions are afraid that companies behind them will be able to make stablecoins quickly available to millions of their users or, as in the case of Facebook, to over a billion of their customers.

Thursday's statement concerns all projects based on stablecoins, both future and current. However, the fact that the whole matter relates to the project supported by Facebook can be deduced from the fragment: "Some recent projects of global dimension have provided insufficient information on how precisely they intend to manage risks and operate their business".

This is another blow for Libra that was announced in the middle of this year. Earlier, the largest partners, including Visa, Mastercard, eBay and PayPal, withdrew from the project.

There are some positives but…

The EU has, however, also seen benefits for the financial system in stablecoins. These would include ways of making cheap and fast payments, especially cross-border ones. Such initiatives themselves underline, in the view of the European Commission and the Council of Europe, "the importance of continuous improvements to payment arrangements in order to meet market and consumer expectations". Nevertheless, the Union is now paying attention, beyond any possible benefits, to risks related to consumer protection, privacy, taxation, cyber security and operational resilience, money laundering, terrorist financing, market integrity, governance and legal certainty.

The justified myriad of fears, even with regard to stablecoins, shows how far the world is from implementing the settlements in the decentralised cryptocurrencies, such as Bitcoin or Ethereum, which are not backed by any assets. Today, it seems more probable that centralised cryptocurrencies will be introduced into the financial system. Also on Thursday Reuters reported that European Finance Ministers praised the European Central Bank "on a public digital currency, which could represent an alternative to private initiatives".

Bitcoin's fame is fading?

Growing concerns about Facebook's Libra, the withdrawal of the largest partners and the drop in the overall cryptocurrency exposure in the global media led to a significant depreciation of Bitcoin - from nearly 14,000 USD in the first half of this year to about 7,400 USD now.

The price of the most popular and the largest cryptocurrency in terms of capitalisation still remains below the 200-day moving average (approx. 8,200 USD as of December, 6th). The aforementioned average is one of the key support indicators for investors, not only in the case of cryptocurrencies.

Last time when Bitcoin was quoted below this limit was from the end of May 2018 to the beginning of April this year. This may hamper any significant upward price movement. In fact, the EU announcement paves the way for increased supply pressure and a deeper decline in the Bitcoin's valuation to around 4,000-5,000 USD.

6 Dec 2019 15:07|Bartosz Grejner

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