Central banks want to look under crypto’s hood – is this a positive sign?

The Bank for International Settlements (BIS) Project Atlas report provides yet another indication that the worlds of crypto and traditional finance can merge.

On the surface, this proof-of-concept project by some of Europe's biggest central banks — such as Germany's Deutsche Bundesbank and the Netherlands' Central Bank de Nederlandsche Bank — seems modest: protecting more crypto-related data like cross-border bitcoin. (BTC) flows.

But the mere fact that these incumbent financial giants want such information shows that crypto-assets and decentralized finance (DeFi) applications are becoming, in the words of the report, “part of the global financial ecosystem.”

The BIS, the central bank, and its partners still have some concerns about this new ecosystem, including a “lack of transparency.” For example, finding seemingly simple things like countries where crypto exchanges live is still difficult.

And then, there are the potentially lasting risks to financial stability presented by these new financial assets. In fact, in the introduction to a 40-page report published in early October, the BIS cites how recent crypto failures – such as the recent theft of $61 million from Curve Finance pools – are “vulnerabilities in DeFi projects”. Moreover:

“The collapse of the Terra (Luna) protocol algorithmic stablecoin and the bankruptcy of centralized crypto exchange FTX also illustrate the pitfalls of unregulated markets.

Overall, this seemingly innocuous report raises some minor questions. Does crypto have a macro data problem? Why is cross-border flows difficult to identify? Is there a simple solution to this ambiguity?

Finally, assuming there is a problem, shouldn't the industry at least engage with central banks to provide some answers?

Is crypto data really missing?

“It's a real concern,” Clemens Graf von Luckner, a former World Bank economist who conducts foreign portfolio investment research for the International Monetary Fund, told Cointelegraph.

Central banks generally want to know what assets their residents hold in other parts of the world. Large amounts of offshore assets can serve as collateral in times of financial distress.

Therefore, central banks want to know how much crypto is leaving their country and for what purpose. “Foreign assets can be useful,” von Luckner said. A large amount of crypto savings abroad can be seen as a positive by central banks concerned about their strategic safety and soundness. In times of crisis, a country can benefit financially—at least for a while—if its citizens have significant overseas holdings, von Luckner noted.

However, the decentralized nature of cryptocurrency, the anonymity of its users, and the global distribution of transactions make it more difficult for central banks — or anyone else — to collect information, Obligatory Co-Founder and Chief Legal Officer Stefan Mayer told Cointelegraph, adding:

“The difficulty with crypto is that the market structure is very flexible and sometimes completely peer-to-peer. There's no information in the typical pyramid structure going from banks to central banks to the BIS.

But why now? After all, Bitcoin has been around since 2009. Why are European banks suddenly interested in cross-border BTC flows at this moment?

According to von Luckner, the short answer is that crypto volumes have not been big enough to get the central bank's attention in the past. Today, crypto is a $1 trillion industry.

Moreover, the banks “have a real influence on these [new assets] It can be applied to the financial aspects of fiat currency,” Jacob Joseph, research analyst at crypto analytics CCData, told Cointelegraph.

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For his part, Mayer speculated that “the emergence of stablecoins has increased the demand for payment data collection.”

It's still complicated. Many transactions take place outside of controlled entryways, Meyer said. When regulated gateways exist, they are often not banks, but “unregulated exchanges, payment service providers, or other anti-money laundering regulated financial intermediaries.” He added:

“The usual central actors in the world of fiat – for example, the operators of the SWIFT network as well as interbank settlement systems – do not exist in crypto.”

What should be done?

Central banks are getting their crypto data from private analyst firms like Chainalysis, but even this is not entirely satisfactory, von Luckner said. An analytics firm can follow Bitcoin flows from Vietnam to Australia, for example; But if an Australian-based exchange receiving a BTC transaction has a New Zealand node, how does the central bank know if this BTC ultimately stays in Australia or goes to New Zealand?

There doesn't seem to be an easy answer at the moment. Mayer hopes that central banks, BIS and others will be able to collect data without introducing new regulatory reporting requirements.

There is some reason to believe this could happen, including the proliferation of on-chain monitoring tools, the fact that some large crypto exchanges are already voluntarily disclosing more information, and the growing recognition that most crypto transactions are anonymous and not fully anonymous, Meyer said.

If crypto exchanges become more active, would it be beneficial for them to try harder to provide central banks with the information they need?

“It helps a lot,” Von Luckner replied. If exchanges gave some basic instructions via API – like “People in this country bought and sold so much crypto, but the network wasn't big” – this would give “central banks more confidence.”

“Providing regulators with clear and intelligent information will help develop a reasonable regulatory framework,” agrees Joseph. He noted that analytics firms such as Chainalysis and Elliptic already share “on-chain data” with regulated entities. “This collaborative approach between crypto companies and regulators will continue to be critical to effectively navigating the regulatory landscape.”

As part of the initial concept, Project Atlas will stream crypto-assets across geographies. He looked at Bitcoin transactions from crypto exchanges “along with the location of those exchanges, a proxy for cross-border capital flows. Among the problems mentioned are:

“Country positioning is not always visible to crypto exchanges, and ownership information is inherently incomplete and may not be completely accurate.”

So, for starters, maybe crypto exchanges can specify a local address?

“There are various factors that affect this transparency,” von Luckner told Cointelegraph. “Part of it is the crypto ethos, which is a global, borderless, decentralized protocol – although many of the larger exchanges and protocols are owned by a relatively small group of individuals. But these centralized exchanges They often prefer to present themselves as decentralized enterprises.

This openness can also be driven by pressing business interests, such as tax cuts, von Luckner added. The exchange may make most of its profits in Germany but want to pay taxes in Ireland, where tax rates are lower, for example.

According to Von Luckner, “It is not in the interest of the industry,” at least in the long term, because “this risk is crypto in general to be banned. It is only human nature. People – that is, regulators – who do not understand, want to go, argued.

Moreover, the average Bitcoin or crypto user doesn't want a completely decentralized system with complete anonymity, von Luckner added. “Otherwise, everyone would be using Monero” or another privacy coin for their transactions. Most of them are looking for fast, cheap and secure financial transactions.

Is Europe over-regulated?

There is a possibility that this is not just a European fix focused on cross-border crypto-flows and macro-data, but a global problem. Some believe that Europe is already over-regulated, especially at the start-up level. Maybe this is another example?

Despite concerns that European laws have stifled innovation in the past, Joseph said recent developments such as the MCA have been embraced by large parts of the crypto industry.

“The introduction of a clear regulatory framework, which the industry has long sought, represents a significant step forward in Europe.”

Indeed, the number of crypto companies moving to Europe has increased due to changes around MiCA, Joseph said.

Meyer, on the other hand, is from Switzerland, which is part of the European Union, but not the European Union. He told Cointelegraph that Europe is “doing an excellent job of creating regulatory transparency, which is critical to business certainty. By far, the worst thing a jurisdiction can do is to have no or unclear rules. There is nothing more stifling to innovation.”

Does crypto need to merge?

In general, a few things seem clear. First, European central banks are clearly worried. “Regulators are increasingly concerned about the scope of crypto markets and their integration with traditional finance,” the report said.

Second, cryptocurrencies have reached a high level, enough that major regulators around the world want to know more about them.

“The more dynamic the industry is – and the crypto industry is very dynamic – the knowledge gap between the market and (central) banks is huge,” Meyer said. Therefore, this initiative on the part of the BIS “seems reasonable, although to some extent it is an educational project of the BIS and charitable central banks.”

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Third, it is too early to say whether European central banks are ready to unconditionally accept Bitcoin and other cryptocurrencies. It still seems clear that “Cryptop Crypto has evolved and now requires attention, monitoring and control, which indicates his. [crypto’s] presence in the broader financial ecosystem,” said Joseph.

Finally, the crypto industry may have to seriously consider providing global regulators with the macro information they need – to fully integrate into the existing financial system. “This is the only way [crypto] To live is to assimilate,” said von Luckner. Otherwise, it can continue to exist, but only on the fringes of the economy.