ECB Report States Stablecoins Must Be Urgently Regulated
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ECB Report States Stablecoins Must Be Urgently Regulated

The European Central Bank (ECB) released a new report on potential risks posed by stablecoins and other crypto assets.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

In its latest report “A deep dive into crypto-financial risks: stablecoins, DeFi and climate transition risk”, the European Central Bank (ECB) reflected on the stablecoins’ role in the crypto space as well as their risks following the collapse of TerraUSD (UST) earlier this year.

How Stablecoins Can Jeopardize Financial Stability

Stablecoins are digital currencies whose value is pegged to another currency or financial instruments like the U.S. dollar or gold. The key purpose of stablecoins is to serve as a medium of exchange and serve as an alternative to more volatile crypto assets like Bitcoin and Ethereum.

Because they are meant to bring stability to the crypto ecosystem, most crypto investors use stablecoins to keep their money invested in exchange, allowing them to easily switch between different cryptocurrencies without having to cash out.

However, some of the developments in the crypto world over the past recent months might suggest that these assets are not so stable after all. In May, an algorithmic stablecoin TerraUSD (UST) collapsed, while the largest stablecoin Tether (USDT) also lost its peg to the US dollar, upsetting the entire crypto market.

The report by ECB says that the key purpose of stablecoins in the broader crypto ecosystem and their role for unbacked cryptocurrencies could have a domino effect on the entire financial system if those unbacked cryptocurrencies somehow jeopardize the financial stability in the future.

“Given that the largest stablecoins serve a critical function for crypto-asset markets’ liquidity, this could have wide-ranging implications for crypto-asset markets if there is a run on or failure of one of the largest stablecoins”

A deep dive into crypto financial risks: stablecoins, DeFi and climate transition risk

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Stablecoins Must Be Urgently Regulated, Says ECB

The ECB also argues that stablecoins have failed to prove to be a practical means of payment in the economy. The reason for this is primarily their transaction speed and fees, but also other conditions, because of which there has been low activity among European payment service providers in the stablecoin market.

Even though stablecoins have not seriously jeopardized the financial stability in the euro area yet, this could easily change given the pace at which these assets grow.

As a result, “appropriate regulatory, supervisory and oversight frameworks need to be implemented urgently before stablecoins become a risk to financial stability,” continued the ECB.

Earlier this year, the European Parliament passed the Markets in Crypto-assets (MiCA) Regulation, a regulatory framework designed to preserve financial stability and protect investors from the potential risks of unbacked crypto-assets and stablecoins, while allowing innovation of crypto assets. The adoption of MiCA marked an important milestone for crypto regulation.

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Do you agree with the ECB report’s stance on stablecoins? Let us know in the comments.

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