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Cryptocurrencies pose a significant danger to the economy

Updated: Sep 26, 2022

Losing 26% of its value in the last month, Bitcoin and other cryptocurrencies are in danger of dragging the "real economy" with their unpredictable fluctuations. Fabio Panetta, a member of the ECB's governing body, said in an interview on May 5 that "the value of the cryptocurrency market exceeds that of the mortgage market which triggered the financial crisis." On the occasion of the above, Mr. Christos Fanopoulos, Senior Director of the Banking Department of the Central Bank responded to CNA’s questions regarding cryptocurrencies.

What are cryptocurrencies and what are the risks

Explaining what cryptocurrencies are, Mr. Fanopoulos noted that these assets are not "currencies" in the broad sense we are used to. Instead, it is a high-risk investment.

"Cryptocurrencies or crypto assets (hereinafter referred to as cryptocurrencies) are a digital or virtual asset that operate as a means of trading based on the principles of cryptography, a method that does not allow third parties to access information," he said. A characteristic of cryptocurrencies is that their production, storage and distribution as well as all transactions executed with them are done exclusively electronically.

He stressed that the cryptocurrencies are not issued, nor are they guaranteed by any public authority. Furthermore, they do not have legal status of currency or money and the operation of most of them is not subject to the control of a central body, which carries increased risks for individuals and legal entities who choose to trade or hold positions in cryptocurrencies.

As he said, the main risks are related to the lack of a reliable supervisory / regulatory framework capable of offering legal protection to cryptocurrency holders, to the anonymity and lack of transparency that usually surrounds cryptocurrency transactions, to misleading or incomplete information from providers to consumers and investors. In addition, weak governance structures and cyber security measures implemented by online platforms acting as cryptocurrency exchanges are at risk, with some collapsing, while in occasions, clients’ money has been stolen by hackers. Finally, the great volatility of cryptocurrency values ​​is dangerous, which in combination with the lack of liquidity and easy exit options from such transactions, can lead to large losses in the capital of cryptocurrency owners.

Risks for the European and Cypriot economy

Mr. Fanopoulos, answering whether the European economy can be affected by them, noted that the upward trend recorded in this market and the high volatility recorded by the prices of cryptocurrencies in combination with the above risks, outline a potential risk for the European economy.

In 2018, the Financial Stability Report identified in its report various channels through which financial stability and the economy in general can be affected. Among them, there is the impact of financial wealth and trust in general. The interconnection of the cryptocurrency market with the financial sector and payment systems are also potential risks to the economy, he said, adding that it is worth noting that the above risks are additional unbalanced factors for the impact that can have on the economy, especially in the event of a sharp and uncontrollable downward price adjustment.

Regarding Cyprus, he noted that at this stage there is no data on the exposure of the Cypriot economy to cryptocurrencies. Based on the ECB data for 6 major economies, as published in the latest ECB Financial Stability Report, it appears, however, that up to 10% of households hold cryptocurrencies.



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