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Estcoin Update: Estonia Bows to Pressure from EU, Banks, Scales Down National Cryptocurrency Project

Estonia will significantly scale down its national cryptocurrency plans after sustained criticism from both the European Central Bank (ECB) and local banking authorities in the country. Consequently, the proposed digital asset called Estcoin will be employed in Estonia’s e-residency program.

Estcoin Will Not Be a National Cryptocurrency

In August 2017, state officials in Estonia revealed plans to create Estcoin, a national cryptocurrency for the country of 1.3 million people. According to the information at the time, Estcoin would be tethered to the Euro, the single Eurozone currency. By so doing, the tokens would become virtual stablecoins tied to the Euro fiat currency. Many hailed the decision as another proof of Estonia’s forward-thinking status. However, the plans drew a lot of criticisms from the ECB and even from the banking industry in the country.

It all began with ECB president, Mario Draghi who said:

No member state can introduce its own currency; the currency of the eurozone is the euro.

ECB governor, Ardo Hansson also shared Draghi’s sentiments, accusing Estonian state officials of spreading false and misleading reports. According to Bloomberg, the country has announced that it will no longer move forward with its Estcoin national digital currency plan.

Estcoin to be Used for E-Residency Program Only

The other Estcoin use case has always been in the notarization of documents in the country’s e-residency program. All indications now point to that being the focus of the proposed cryptocurrency. Estcoins serve as an incentive to foreigners and e-residents to sign documents using the country’s electronic identification paradigm remotely. The government-sponsored e-residency project has so far issued 35,000 identification cards to foreigners. The majority of the ID card recipients are from Russia, Ukraine, and Finland.

Commenting on the development, Siim Sikkut, Estonia’s chief IT strategist speaking to local media in Tallinn said:

We agreed in discussions with politicians that Estcoin will proceed as a means for transactions inside the e-resident community. Other options aren’t on the table. We’re not building a new currency.

According to Estcoin creator, Kaspar Korjus, the token will only be utilized within the e-residency ecosystem for the time being. The Estcoin white paper author also poured cold water on any plans to use the token as a national cryptocurrency. He, however, revealed that other use-cases for the coin were still being debated.

Blockchain Adoption in Estonia

Estonia was one of the first countries to adopt blockchain technology for administrative purposes back when the viability of the technology was still being debated. It is considered to be one of the most technologically developed countries in the Eastern European sub-region. Apart from the e-residency program, a lot of the country’s administrative activities exists on fully digitized infrastructure. Estonia has already applied blockchain in areas like healthcare.

Will countries like Sweden and Norway face the same EU backlash for their national cryptocurrency plans? How long do you think it will take for countries to launch their own state-issued digital currency tokens? Keep the conversation going in the comment section below.

Images courtesy of Shutterstock and Pixabay.

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European Central Bank’s Mersch Says Banks Should ‘Segregate’ Crypto Trading

European Central Bank (ECB) board member Yves Mersch has said that banks should “segregate” their dealings in cryptocurrencies from other activities, Reuters reported May 14.

Reuters quotes Mersch as raising concerns over the high volatility of crypto markets, emphasizing that digital tokens “do not qualify as money,” and that their issuers, as well as dealers, exchanges, banks, or clearing houses, should be regulated.

Mersch reportedly noted that even at its peak market capitalization in January 2018 –  which Mersch mistakenly reports as $432 bln rather than the actual $800 bln – the crypto market is still too small to threaten financial stability. He said however that if cryptocurrencies were to be used as collateral for bank loans or for settling trades at clearing houses, there would be an argument for such activities being “ring-fenced” from other trading and investments.

As Reuters notes, the European banks regulated by ECB are not currently dealing in crypto. In the US, investment banking giant Goldman Sachs recently announced it would be opening a crypto trading desk “within weeks.”

ECB’s Yves Mersch has been a staunch critic of the increasing interconnection of the traditional financial sector with the cryptocurrency space, saying that cryptocurrencies pose a risk of “contagion and contamination of the existing financial system” in February this year.

Notwithstanding Mersch’s concerns – that are shared by others such as the Bank of International Settlements’ (BIS) Augustín Carstens – the ECB’s Chair of the Supervisory Board Daniele Nouy told CNBC in February that future involvement of the ECB in cryptocurrency regulation was likely to be “very, very low”.

In March, ECB and BIS issued a statement on Bitcoin, as well as central bank-issued digital currencies (CBDCs), saying they are “not the answer to the cashless economy.”

ECB has however championed blockchain’s potential for transforming securities settlements, against the backdrop of the European Commission’s Blockchain Observatory, which aims at “uniting” the European economy around the technology.

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Central Banks Say Blockchain Could Shake Up Securities Settlement

A newly published report from the European Central Bank and the Bank of Japan argues that distributed ledger tech (DLT) could be used to create novel securities settlement mechanisms, including “cross-chain atomic swaps” between unconnected ledgers.

The findings are the result of the central banks’ joint DLT research initiative, dubbed Project Stella, which was launched in December of 2016.

While intended to “contribute to the broader debate around the usability of DLT,” this particular phase of the project examined “how the delivery of securities against cash could be conceptually designed and operated in a DLT environment.”

The report focuses on the delivery versus payment (DvP) securities settlement method, in which assets are linked such that the transfer of one asset is executed if and only if the transfer of the other asset also occurs – this is also referred to as “atomicity.”

Researchers designed three prototypes using three platforms: Corda, Elements and Hyperledger Fabric. According to the report, they found that DvP could be executed in a DLT system with cash and securities on both a single ledger and between separate ledgers.

“Conceptual analysis and experiments have proven that cross-ledger DvP could function even without any connection between individual ledgers – a novelty which does not exist in today’s set-up,” the report states, going on to explain:

“Functionalities such as ‘cross-chain’ atomic swaps have the potential to help ensure the interoperability between ledgers (of either the same or different DLT platforms) without necessarily requiring connections and institutional arrangements between them.”

However, the report also cautions that cross-ledger DvP systems could add complexity and operational challenges to settlements. For example, DvP transactions between unconnected ledgers would necessitate “several process steps and interactions between the seller and the buyer,” it says.

Likewise, such a system could affect transaction speed and “require the temporary blockage of liquidity.” The lack of system synchronization could also “expose participants to principal risk if one of the two counterparties does not complete the necessary process steps,” the researchers added.

Indeed, the conclusion that the technology isn’t ready to replace settlement systems was highlighted in last September’s report on Project Stella.

As such, the report concludes, “further analysis on the safety and efficiency of individual approaches [to applying DLT to DvP arrangements] is warranted,” in addition to a full legal analysis, which is beyond the scope of the existing project.

Connected chains image via Shutterstock

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Europe's Central Bank Touts Crypto As Underbanked Aid

The European Central Bank (ECB) has said cryptocurrencies could “be an early sign of change” around the world.

In an opinion piece on Tuesday titled “Bitcoin is not the answer to a cashless society,” ECB executive board member Benoît Coeuré and Bank of International Settlements Markets Committee chair Jacqueline Loh write that, while digital money may be the way of the future, existing public cryptocurrencies like bitcoin are not that future. Rather, the pair tout the potential of central bank digital currencies (CBDCs) in changing the way consumers have control of their money.

Still, the piece acknowledged that cryptocurrencies are addressing an important shortfall in current banking systems, noting, “Despite its many faults, bitcoin has put the spotlight on an old failing of our current system: cross-border retail payments.”

The authors continue:

“Such payments not only permit shoppers to easily buy goods online from overseas, but also allow foreign workers to send money home, supporting financial inclusion and development. However, [existing] payment channels are generally much slower, less transparent and way more expensive than domestic ones.”

To address this failing, central banks must improve international payment channels and rise to the challenge bitcoin is presenting fiat currencies, the opinion piece asserts.

The article also outlined the potential role a central bank-backed cryptocurrency could play, noting that consumers are already increasingly using digital payment systems instead of cash. Creating a central bank digital currency would grant consumers direct access to funds, rather than forcing them to go through a bank.

Stepping back, the comments echo those made in a Bank for International Settlements (BIS) report yesterday, which highlighted perceived issues with CBDCs, specifically noting that they could give customers the power to fuel faster runs, thus draining banks’ digital coffers during periods of financial instability.

However, the piece did emphasize that a central bank-backed cryptocurrency is possible, echoing remarks made by People’s Bank of China chairman Zhou Xiaochuan, who last week said it was “inevitable” that the country would one day have a national digital currency of its own.

Benoît Coeuré image via Wikimedia Commons 

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Bank For International Settlements Distances Itself From Centralized Digital Currencies

A new joint European banking report has poured cold water on the effectiveness of so-called central bank digital currencies (CBDCs).

The report, submitted by two working groups under the auspices of the Bank for International Settlements (BIS) and European Central Bank (ECB), warns about the “adverse” effect of introducing a CBDC.

It also advocates that banks and other authorities “continue their broad monitoring” of digital currencies outside centralized control such as Bitcoin.

“Any steps towards the possible launch of a CBDC should be subject to careful and thorough consideration. Further research on the possible effects on interest rates, the structure of intermediation, financial stability and financial supervision is warranted,” its authors conclude.

“The effects on movements in exchange rates and other asset prices remain largely unknown and also deserve further exploration.”

In separate comments on the report’s findings, ECB and BIS executives Benoît Cœuré and Jacqueline Loh said that decentralized digital currency, specifically Bitcoin, was “not the answer to the cashless economy.”

The hands-off approach to CBDCs further broadens the divide between the EU and other countries’ central banks on the concept.

Russia, Venezuela, the Marshall Islands, Cambodia, Turkey and Iran are conversely issuing or at least sympathetic to the concept of state-issued cryptocurrency.

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Regulate Bitcoin? 'Not The ECB's Responsibility,' Says Mario Draghi

Mario Draghi, president of the European Central Bank, has said it’s not his institution’s job to regulate cryptocurrencies.

As part of the ECB’s #AskDraghi video series, the former Italian central banker said he has seen many users on Twitter ask if the ECB would regulate or even ban bitcoin.

In response, he said:

“It’s not the ECB’s responsibility to do that.”

Draghi also discussed whether he would recommend purchasing bitcoin in response to a question from a college student.

He indicated he would think “carefully” about buying bitcoin, explaining that he does not see it as a currency. While the euro’s value is stable, he added, “the value of a bitcoin oscillates wildly.”

Also hitting out at cryptocurrencies’ decentralized nature, he continued: “The euro is backed by the European Central Bank. The dollar is backed by the Federal Reserve. Currencies are backed by the central banks or their governments. Nobody backs bitcoin.”

This is not the first time Draghi has made such comments on cryptocurrencies and their regulation. The ECB chief said in September 2017, that the ECB itself has “no power” to regulate bitcoin, and, in November, he said that cryptocurrencies have a limited impact on the world economy.

At the same time as it published the video, the ECB released an explainer on bitcoin that goes into deeper detail on how the institution sees bitcoin.

In addition to echoing Draghi’s comments on price volatility and the lack of institutional or government backing, the explainer notes that bitcoin is not accepted widely and “transactions are slow and expensive.”

Furthermore, it adds that there are no legal protections for users who lose their bitcoins to theft if their wallet were to be hacked.

Mario Draghi image via ECB/YouTube

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ECB Board Member: Crypto Is ‘Contagion And Contamination’ Infecting The Global Financial System

Yves Mersch, Executive Board member of the European Central Bank (ECB), referred to cryptocurrencies as a risk of “contagion and contamination of the existing financial system” during an interview with 4 Technology on Feb. 8.

Both the traditional and crypto markets fell sharply at the beginning of this week, prompting responses from shaken financial institutions like the wave of banks banning credit cards for crypto purchases.

Mersch warned of the potential for crypto markets to begin more strongly influencing traditional markets as the two have become more interconnected:

“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. This then becomes a concern for the central bank.”

During the Bloomberg interview, Mersch recommended that regulatory options should be looked into even before the upcoming March G20 summit in Argentina, where crypto regulation is expected to be high on the agenda,

“For me, one obligation would already be to force the unregulated platforms to report transactions in a harmonized way to repositories so that we would have access to information — also in order to create a better response.”

Mersch adds that ECB is also concerned about the “social and psychological effect” that cryptocurrencies “seem to have.”

On Feb. 6, general manager of the Bank of International Settlements (BIS) Augustín Carstens similarly voiced concerns about the increasing integration between cryptocurrencies and traditional finance. Carstens called Bitcoin a “Ponzi scheme” and warned of a “threat to financial stability” if cryptocurrencies became more connected to the global financial system.

Mersch told Bloomberg that the European Central Bank fully agrees with Carstens concern:

“You won’t be surprised to know that we at the ECB are fully in line with his views and we have similar worries, or similar endeavors we are working on.”

Just yesterday in an interview with CNBC, ECB’s Chair of the Supervisory Board Daniele Nouy said that future involvement of ECB-regulated banks in crypto regulation was “very very low,” and the crypto regulation for ECB itself was “not exactly very high on its to-do list.”

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ECB's Mersch Airs Concerns Over Crypto 'Gold Rush'

European Central Bank (ECB) executive board member Yves Mersch is coming out in support of comments made this week by Agustin Carstens, general manager of the Bank for International Settlements (BIS), in which he laid into bitcoin as a bubble, a Ponzi scheme and a threat to central banks.

According to an FT report, Mersch is now saying that, while regulators had been taking a wait-and-see approach to cryptocurrencies, “since this hype accelerated at the end of last year it has moved higher up on the agenda.”

But, he added that, although the ECB shares Carstens’ concerns over the issue of crypto assets, he doesn’t believe the market is big enough to affect the wider economy.

Instead, the central bank is “more concerned about the social and psychological effect” of the hype in the market.

Mersch said:

“There is so much money flowing in that it’s like a gold rush – but there is no gold.”

The ECB board member also raised the subject of the illicit use of cryptocurrencies in money laundering and terrorist financing, saying that a solution may be to “force” unregulated exchanges to report transactions – giving the ECB data it needs to “create a better response.”

In his Feb. 6 comments, Carstens argued that cryptocurrencies could become “parasites” on the financial system, saying they must be held to the same standards as banking and payment services. He further stated that cryptocurrencies should not be allowed to undermine trust in central banks.

“The tried, trusted and resilient modern way to provide confidence in public money is the independent central bank,” Carstens said at the time.

Mersch’s comments come a day after the European Union’s top securities watchdog – the European Securities and Markets Authority (ESMA) – released a report indicating that cryptocurrencies will be one of its top priorities for 2018.

In its supervisory work agenda for 2018, it revealed that one of its five primary tasks for the year will be monitoring the development of financial innovation, including cryptocurrency and blockchain technology.

Yves Mersch image via CoinDesk archive

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ECB President: EU Banks Show 'Limited Appetite' for Cryptocurrencies

The European Central Bank (ECB) said that financial institutions in the European Union do not appear to be as enthusiastic about cryptocurrencies as the public.

In a European Parliament meeting on Feb. 5, the ECB’s president, Mario Draghi, commented that the central bank is not seeing a “notable holding of cryptocurrencies” among banks in the region.

“Actually, the credit institutions established in the European Union are showing a limited appetite for digital currencies like bitcoin, notwithstanding the high level of public interest,” he added.

Yet, he indicated the belief that recent development in the market, such as the launch of bitcoin futures contracts in the U.S., may spark growing interest among the EU’s financial institutions.

He also offered a warning that banks should be wary of the risk of holding cryptocurrencies due to high volatility and risk, as well as the absence of a specific supervisory framework.

While Draghi has stated before that the ECB has no authority to regulate cryptocurrencies, he concluded that exploration of their potential impact on the establishment is currently in progress through the Single Supervisory Mechanism. This allows the ECB to perform a supervisory role in monitoring financial stability among participating nations.

Draghi’s comments also follow remarks made in October 2017 in which he said that cryptocurrencies are still too low-impact to be worth regulating within the EU.

Currently Europe is home to some of the world’s biggest cryptocurrency exchanges such as Bitstamp and HitBTC, which together saw over $1 billion in trading volume in the last 24 hours, according to data from CoinMarketCap.

Mario Draghi image via Shutterstock

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