The European Central Bank (ECB) has published a report analyzing the growth of the cryptocurrency market in the last decade and the risks it poses for the current financial system.
A section of the report dedicated to stablecoins discusses the central role they play in today’s ecosystem. Stablecoins are increasingly used to interconnect various blockchain networks and play a critical role in providing liquidity to the decentralized finance (DeFi) ecosystem.
The report further analyzed whether these stablecoins could find a place in the traditional financial system, but concluded that the lack of regulatory oversight, coupled with the recent debacle of algorithmic stablecoin ecosystems like Terra, indicates the contagion effects that these stablecoins could have on the financial system. An excerpt from the report said:
“The largest stablecoins serve a critical function for the liquidity of the crypto asset markets, this could have wide implications for the crypto asset markets if there is a bank run or failure of one of the major stablecoins.”
It wasn’t just algorithmic stablecoins that faced crisis during the cryptocurrency market crash in May, even the centralized stablecoin Tether (USDT) lost its peg to the dollar for a time and saw nearly 10% in capital withdrawals.
The ECB also rejected the idea of using stablecoins as a payment method, saying they are impractical. because the speed and the transactional cost, as well as its reimbursement conditions, have proven to be “unsuitable for use in payments in the real economy”.
The ECB recommended the adoption of adequate supervisory and regulatory measures to ensure that stablecoins do not pose a risk to financial stability in European countries. Nevertheless, The report noted that stablecoin penetration in the region is limited, as European payment service providers have not been very active in stablecoin markets so far.
The European Union recently approved the Markets in Crypto-Assets (MiCa) regulatory framework, which offers guidance to Crypto Asset Service Providers (CASPs) to operate in the European region. The interim agreement includes rules that will cover issuers of unbacked crypto assets, stablecoins, trading platforms and cryptocurrency wallets.
3/13 Large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are used widely as a means of payment, and a cap of €200million in transactions/day.
— Ernest Urtasun (@ernesturtasun) June 30, 2022
The ECB intends to restrict the issuance of stablecoins to electronic money entities and credit institutions to ensure that an incident similar to Terra does not lead to investors losing billions of dollars.
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