18.01.2021

European Union to Regulate Stablecoins, Not Issue Its Own

The declaration is being developed in response to Libra, the global stablecoin project introduced by Facebook in June. Despite regulatory qualms about the stablecoin, Libra has so far proceeded, with its governing council formally signing onto the project last month.

The European Union is taking a closer look at how to regulate stablecoins, but has no plans to issue one of its own.

A group within the EU presidency is working on a draft political declaration regarding the regulation of stablecoins, an individual familiar with the matter told CoinDesk. First reported by Reuters, the declaration will say the EU should regulate stablecoins in particular. However, the source pushed back on claims that the declaration would urge the EU to create a cryptocurrency of its own.

“This is a rather short declaration that is about the EU position on how to handle those new types of cryptocurrencies,” the source told CoinDesk. “The focus is on how those cryptocurrencies should be regulated.”

The declaration does not specifically recommend that the EU should develop its own cryptocurrency in response to Libra, however. CoinDesk’s source explained that developing its own cryptocurrency is one possible option for the EU that the declaration says “should be explored.”

Pushing back on the Reuters report, the source said, “There’s absolutely no commitment at this stage to put in place a new cryptocurrency,” adding:

“The statement is to highlight the need for a proper regulatory framework for those stablecoins and as a consequence, different ideas should be explored. One of them is the possibility of having something that is managed by the ECB [European Central Bank] and other central banks.”

The source clarified that they could not speak to what the final version of the declaration would look like.The statement will be finalized by Friday, Nov. 8 and presented to EU finance ministers. The declaration is expected to be adopted by the EU on Dec. 5, at the finance ministers’ next meeting, the source said.

European Central Bank Calls for Proactive Stablecoin Regulation

In a recent in-depth report on global stablecoins, the European Central Bank, or ECB, pushed for clear regulatory parameters for stablecoins, citing risks as well as gaps in current regulations.

“In order to reap the potential benefits of global stablecoins, a robust regulatory framework needs to be put in place in order to address these risks before such arrangements are allowed to operate,” the ECB wrote in its May 5 report.

The deep dive sees potential, but not without risks

The ECB’s report noted several benefits around international stablecoins, including speed and simplicity – aspects the public deems important.

The governing bank, however, did not shy away from detailing the various risks and difficulties possible with such a currency type, including questions on stability, value and possible systemic failure. One specific risk sees users not able to cash in on their exact “stable” value if the asset loses its value peg, or if its backing deviates from an expected level. As the report put it:

“There is a risk that end users will regard the stablecoin as being equivalent to a deposit, given the promise of ‘stable’ value and the possibility of converting coin holdings back into fiat currency at any time.”

One size fits all may not be the best approach

The report also touched on the topic of regulation. Borderless stablecoins may or may not fit governmental frameworks in existence at present.

Depending on the their type, stablecoins can derive their value from a number sources, including mainstream financial assets, crypto assets and fiat currencies, making regulatory waters unclear. Some stablecoins might even fall under the investment category rather than a source of stable value.  The ECB said:

“Given the complexity of its structure, a stablecoin arrangement could, depending on its specific design features, fall under one of a number of different regulatory frameworks – or, potentially, none of them.”

The ECB also studied Facebook’s Libra in its report, relating various numbers and metrics to different scenarios.

Although the ECB called for regulatory clarity, the governing body also mentioned the need for a well-rounded approach. “To reap their potential benefits without undermining financial stability, we must ensure that stablecoin arrangements do not operate in a regulatory vacuum,” the ECB concluded.

Central Bank Digital Currencies, a classification of stablecoin, have also visited numerous headlines in recent weeks as countries rush to figure out the best approach for a digital transition.

Cointelegraph reached out to the ECB for additional details, but received no response as of press time. This article will be updated accordingly should a response come in.

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