Central Banks and Regulation of Cryptocurrencies

Review of Banking and Financial Law (Forthcoming)

University of Luxembourg Law Working Paper No. 2019-014

54 Pages Posted: 17 Jul 2019 Last revised: 6 Dec 2019

See all articles by Hossein Nabilou

Hossein Nabilou

University of Amsterdam, Amsterdam Law School; The International Institute for the Unification of Private Law (UNIDROIT)

André Prüm

Universite du Luxembourg; European Banking Institute

Date Written: July 17, 2019


This paper explores the interface between central banks and cryptocurrencies. Focusing on the European Central Bank (ECB), it identifies the potential threats that the rise of cryptocurrencies would pose to the basic and ancillary tasks of the ECB, in particular, its monetary policy operations and the exercise of its supervisory functions over credit institutions and payment systems. The paper finds that cryptocurrencies can potentially have both direct – through their potential impact on the price stability and monetary policy, and central banks’ monopoly over issuing base money – and indirect effects on central banks, mainly through the institutions and systems that fall under the ECB’s scope of competence.

To address the challenges posed by cryptocurrencies, the ECB may take both legal (including supervisory and oversight) measures and non-legal (or technical) measures. With respect to technical measures, the ECB - to the extent falling within the scope of its competence - may focus on improving the efficiency of existing payment systems and addressing the existing frictions in market infrastructures to indirectly affect the cryptocurrency markets. Alternatively, it can venture into issuing Central Bank Digital Currency (CBDC). Regarding legal measures, central banks could envisage regulating cryptocurrencies either directly or indirectly. However, as the most significant potential impact of cryptocurrencies on central banks is likely to be indirect through the impact of cryptocurrencies on the banking and payment systems, and given the limitations on the ECB’s mandate and its regulatory and supervisory tools, it is apposite for the ECB to consider using indirect strategies and tools to influence cryptocurrency markets. This indirect approach can be implemented through the ECB’s existing supervisory and oversight powers over the banking and payment systems. This paper specifies the direct and indirect measures and assesses their merits in addressing the concerns about cryptocurrencies.

Keywords: Central Bank, European Central Bank, Cryptocurrency, Bitcoin, Money, Regulation

JEL Classification: E42, E51, E58, G01, G23, G28, K22, K23, K24

Suggested Citation

Nabilou, Hossein and Prum, Andre, Central Banks and Regulation of Cryptocurrencies (July 17, 2019). Review of Banking and Financial Law (Forthcoming), University of Luxembourg Law Working Paper No. 2019-014, Available at SSRN: https://ssrn.com/abstract=3421417

Hossein Nabilou (Contact Author)

University of Amsterdam, Amsterdam Law School ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND

HOME PAGE: http://www.uva.nl/profiel/n/a/h.nabilou/h.nabilou.html

The International Institute for the Unification of Private Law (UNIDROIT) ( email )

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Andre Prum

Universite du Luxembourg ( email )

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Luxembourg, L-2721
+352 4666446300 (Phone)

HOME PAGE: http://www.uni.lu

European Banking Institute ( email )


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