[9] Transacting cryptos on blockchains can be inefficient, slow and expensive; they face the blockchain trilemma, whereby aiming for optimal levels of security, scalability and decentralisation at the same time is not achievable. [10] Crypto-assets relying on a proof-of-work validation mechanism, which is especially relevant for bitcoin as the largest crypto-asset by market capitalisation[11], are ecologically detrimental. Public authorities will therefore need to evaluate whether the outsized carbon footprint of certain crypto-assets undermines their green transition commitments. [12] Moreover, proof-of-work validation mechanisms are inadequate for large-scale use. [13] Bitcoin, for example, can only accommodate up to seven transactions per second and fees can be exorbitant. While alternative solutions to overcome the blockchain trilemma and proof-of-work consensus shortcomings have emerged for faster and more affordable transactions, including those outside the blockchain, they have drawbacks of their own. "Off-chain" transactions conducted via third-party platforms compromise the core principles of crypto-assets, including security, validity and immutability. [14] Another  important aspect is the operational risk inherent in public blockchains due to the absence of an accountable central governance body that manages operations, incidents or code errors. [15] Moreover, the handling of crypto-assets can be challenging. In a decentralised blockchain, users must protect their personal keys using self-custody wallets, which can discourage widespread adoption due to the tasks and risks involved, for example the theft or loss of a key. Given the immutability of blockchains, they do not permit transaction reversal. [16]  Instability Another key limitation of unbacked cryptos is their instability.

The notion that stablecoin issuers might invest in crypto-assets could further concentrate holdings and contradict the low-risk requirements for stablecoin reserves. 22. Graf von Luckner, C., Reinhart, C.M. and Rogoff, K. (2023), “Decrypting new age international capital flows”, Journal of Monetary Economics, 1 June. 23. Although it represents only a small part of the crypto-asset market, the stablecoin Tether accounts for close to half of all trading on crypto-asset trading platforms. See the section entitled “Stablecoins’ role within the crypto-asset ecosystem” in Adachi, M. et al. (2022), “Stablecoins’ role in crypto and beyond: functions, risks and policy”, Macroprudential Bulletin, Issue 18, ECB. 24. See the May 2023 report by the ESRB Task Force on Crypto-Assets and Decentralised Finance entitled “Crypto-assets and decentralised finance”. 25. A decentralised finance ecosystem is built around crypto lending that is collateralised by other cryptoassets, using smart contracts to implement margin calls. The failure of FTX had a large impact on the price of crypto-assets serving as collateral for crypto lending. This triggered cascading liquidations by crypto lenders because of the decrease in the value of the collateral. 26. See US Securities and Exchange Commission (2023), SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao, 5 June. 27. In particular, Mastercard, PayPal and Visa continue building capabilities and strategic partnerships to support crypto-assets (as well as stablecoins). 28. See, for example, JP Morgan’s Onyx Coin Systems Product Team, Fidelity’s Fidelity Crypto℠ account and Citi’s collaboration with METACO to develop and pilot digital asset custody capabilities. 29.