Here's what the European Central Bank's crypto warning could bring

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Yves Mersch, an executive board member of the European Central Bank (ECB), the Eurozone's central bank and regulator, aired his views on the growing enthusiasm for cryptocurrencies in an interview with German newspaper Börsen Zeitung, shortly before the New Year.

While Mersch struck a laissez-faire note regarding individual investors — as any outfall on this scale would be small and contained — he issued a starker warning about big banks and market infrastructure providers, such as exchanges, piling into the space as cryptocurrencies see extreme price volatility.

In particular, Mersch singles out big exchanges' stake in the cryptocurrency space as a "major threat to financial stability". When exchanges that link together multiple financial institutions (FIs) start offering crypto-based investment products, such as futures, mutual funds, and exchange-traded funds (ETFs), they can pool together participants' risk, rather than segregating it, making the FIs "jointly liable" for any adverse developments, Mersch explains.

This, in turn, risks putting major FIs or even whole banking systems in trouble, he adds. This comes at a time when an increasing number of both Europe- and US-based exchanges — including SIX, Cboe, and CME — have started rolling out such offerings, opening the space up to large institutional investors.

Mersch's comments suggest that the ECB could be contemplating tougher action on cryptocurrency products. The ECB is a body with legislative powers, and is tasked with maintaining financial stability across the Eurozone. As such, if the organization as a whole shares Mersch's concerns about institutional involvement in the volatile asset class, it's possible that it could either pass new legislation to mitigate such risks, or simply decline to license cryptocurrency-based investment products.

This could mean the region falls behind in the race to provide such offerings, given that in the US the Commodity Futures Trading Commission (CFTC) has already given the green light to multiple exchanges. While this would undoubtedly result in some frustrated investors, it could be the wiser approach, given the novelty of such products and the uncertainty around their effects on broader financial systems.

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