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ECB plans to increase cryptocurrency surveillance using both on-chain and off-chain data

Thu, 08 Aug 2019, 03:52 am UTC

The European Central Bank (ECB) is planning to use both on-chain data and metadata related to off-chain transactions to monitor the crypto market.

The newly released report, entitled “Understanding the crypto-asset phenomenon, its risks and measurement issues” admits that banks’ monitoring activities rely “to a great extent” on publicly available data such as market capitalization, prices, and trading volumes.

But the central bank is planning to utilize commercial data, market indicators, and on-chain data to understand the crypto market. The report revealed that the ECB has already developed a system that utilizes “high-quality” aggregated data.

As per the study, the online solution aims to analyze “the crypto-asset phenomenon” to determine and monitor the effect of financial technology to monetary policy as well as to identify possible risks in areas such as market infrastructures, payments, and financial stability.

The ECB pointed out that there is a need to monitor activities because of the close connection between the traditional financial system and cryptocurrencies. The report further explained that “spillover effects may also be transmitted to the real economy [from the cryptocurrency markets].”

Thus, “closing data gaps associated with crypto-assets” remains to pose a challenge for regulators and financial firms.

However, the report admitted that the use of available data is limited, explaining that they leave “gaps and challenges” including crypto-asset exposure of financial institutions and payment services that utilize layered protocols.

It also pointed out other potential issues for financial policy and stability such as the exposure of derivatives and investment vehicles to digital assets, financial firms shifting to custody, and payment networks using cryptocurrencies.

Although it noted that these implications are “contained and/or manageable,” the links with regulated financial firms “may develop and increase over time.”

Specifically, it is hard to retrieve public data on segments of the crypto-asset market that remain off the radar of public authorities; some relatively illiquid trading platforms may be affected by wash trading; and there is no consistency in the methodology and conventions used by institutionalised exchanges and commercial data providers. Moreover, new and unexpected data needs may well arise with further advancements in crypto-assets and related innovation.

The ECB plans to move into the more gritty detail for its crypto-asset analyses. The bank is also committed to “continue to work on indicators and data by dealing with the complexity and growing challenges encountered in analyzing on-chain and layered protocol transactions.”

The report was established after ECB official Jens Weidmann recently said that everyone should calm down about the emergence of stablecoin, pointing out that although vigilance might be warranted, there is certainly no cause to be alarmed.

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