[31] The crypto industry is seeking to grow by parasitising the financial system: it touts itself as an alternative to the financial sector, yet it seeks shelter within that very sector to address its inherent risks, all in the absence of adequate regulatory safeguards. The public response: backing, regulating or innovating? The public sector response can be encapsulated in three main suggestions. Not giving in to the temptation to offer public backing to cryptos First, the temptation to offer public backing to cryptos must be resisted. The idea of permitting stablecoin issuers as non-bank financial institutions to hold their reserves at central banks might seem appealing, but could lead to serious adverse consequences. By granting stablecoins access to the central bank’s balance sheet, we would effectively outsource the provision of central bank money. If the stablecoin issuer were able to invest its reserve assets[32] in the form of risk-free deposits at the central bank, this would eliminate the investment risks that ultimately fall on the shoulders of stablecoin holders. And the stablecoin issuer could offer the stablecoin holders a means of payment that would be a close substitute for central bank money. [33] This would compromise monetary sovereignty, financial stability and the smooth operation of the payment system. For example, a stablecoin could displace sovereign money by using the large customer network of a big tech, with far-reaching implications. [34] Therefore, central banks should exercise prudence and retain control over their balance sheet and the money supply.

Enhancing transparency and awareness of the risks associated with crypto-assets and their social cost are critical aspects of this approach. Public authorities will also need to address those social costs: for instance, cryptos’ ecological footprint cannot be ignored in view of environmental challenges. Additionally, the experience of FTX, which expanded massively with little oversight, underscores the importance of global crypto regulation and regulatory cooperation. The Financial Stability Board’s  recommendations[39] for the regulation and oversight of crypto-asset activities and markets need to be finalised and implemented urgently, also in non-FSB jurisdictions. The Basel Committee on Banking Supervision's standard on the prudential treatment of banks' crypto-asset exposures is a positive step in this direction. It stipulates conservative capital requirements for unbacked crypto-assets with a risk weight of 1,250%, as well as an exposure limit constraining the total amount of unbacked crypto a bank can hold to generally below 1% of Tier 1 capital. It will be key for the European Union and other Basel jurisdictions to transpose the Basel standard into their legislation by the 1 January 2025 deadline[40]. However, regulation alone will not be sufficient. Innovating: digital settlement assets and central bank digital currencies Third, the public sector needs to contribute to the development of reliable digital settlement assets. Central banks are innovating to provide a stability anchor that maintains trust in all forms of money in the digital age. Central bank money for retail use is currently only available in physical form – cash.