European Central Bank Seeking to Close Gaps on Crypto Network Monitoring

The European Central Bank (ECB) says it is working to close gaps in its crypto-network monitoring regime in order to ensure that risks, “currently contained and/or manageable,” do not, “increase over time and have future implications,” for mainstream financial systems.

“Spillover effects may…be transmitted to the real economy,” the ECB writes in “Understanding the crypto-asset phenomenon, its risks and measurement issues,” published August 7th. 

“This task begins with the development of a monitoring framework to provide the data and insights that are necessary to continually gauge the extent and materiality of evolving crypto-asset risks with a view to ensuring preparedness for any adverse scenarios,” the ECB writes

The ECB acknowledges gaps in currently available market data.

It says it currently, “relies to a great extent on publicly available third-party aggregated data,” but that this information is of variable, “availability and quality owing, in part, to a lack of regulation of some players along the crypto-asset value chain, whose unsupervised activity in a borderless environment often hinders access to reliable information.”

Problems with market surveillance also occur because, “Statistics and supervisory reporting mechanisms do not generally cover crypto-assets.”

The cryptocurrency data world is well known, at this point, for wishful thinking.

Popular crypto market data aggregator CoinMarketCap, for instance, has been persistently criticized for publishing inflated volume figures furnished to them by crypto exchanges trying to seem busy.

CoinMarketCap’s 40-person team, including a reported six data scientists, began furnishing “adjusted volume” exchange listings one year ago. But the site continues to give unsatisfactory answers about questionable figures continuing to appear on the site.

“(T)he team is trying to do it right,” CoinMarketCap chief strategy officer Carylyne Chan told Forbes in July , “it’s taking the site a long time to fix the fake volume issue because …it’s always been balancing between doing it right rather than doing it quickly.”

The ECB says it is carefully curating the publicly-available data on crypto activities and pooling it with, “other data from some commercial sources using API and big data technologies.” Gaps remain, however.

Crypto enthusiasts often prize privacy and exercise their espoused rights to confidential financial transacting.

Most privacy-focused crypto fans by now know that the Bitcoin network is poorly-suited to confidential transacting.

Authorities have lately been shutting down Bitcoin “mixing” and “tumbling” services designed to obscure transaction provenance by jumbling batches of coins together.

As such, crypto companies and users have been responding to these and other diminishing privacy events by moving transactions “off-chain” (onto privately-controlled side chains like Lightning, for instance, which reportedly do not record amounts transacted).

Others have been migrating their activity over to “privacy coin” networks like Dash and Monero, which try to function more like cash and obscure all transaction details (there is sometimes debate about their effectiveness, however).

Regulators around the world seem to have lately woken up to the implications of global cash systems not under their purview.

In the wake of Facebook’s Libra coin announcement in mid-June, previously quiet entities, including the US Treasury, began to sound off publicly about the “national security” and financial stability implications of global crypto networks.

Chinese regulators are reportedly worried that the Libra project, which plans to maintain its own currency reserves consisting of a basket of various bonds and currencies, would be larger denominated by USD, thus further marginalizing the yuan.

Facebook has 2.4 billion users, and rapid adoption of Libra by these users could affect standard cash supplies and diminish financial integrity regimes.

The ECB acknowledges that it’s duties of, “implement(ing) monetary policy and…promot(ing) the smooth operation of payment systems, as well as the Eurosystem’s tasks in the areas of banking supervision and financial stability, may be affected,” by mass use of cryptocurrencies.

“In the light of the implications they might have for the stability and efficiency of the financial system and the economy, and also for the fulfilment of the Eurosystem’s functions, crypto-assets warrant continuous monitoring,” the organization states.

The ECB also promises to look into methods of monitoring off-chain activity:

“Furthermore, investigation will continue regarding the new data sources for information on interlinkages of crypto-assets. With respect to the off-chain transactions, amid a multitude of methodological options, further work will focus on increasing the availability and transparency of the reported data and the methodologies used, harmonising and enriching the metadata and developing best practices for indicators on crypto-assets.”

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