Stablecoins Vulnerable to Regulatory Uncertainty: European Central Bank

On Aug. 29, the ECB released a new paper devoted to stablecoins, which it describes as digital units of value that are not a form of any specific currency but rather rely on a set of stabilization tools in order to minimize fluctuations in their price.

Stablecoins with a clear governance framework may be hampered by the uncertainty of the lack of regulation, according to the European Central Bank (ECB).

The ECB’s paper is called “In search for stability in crypto-assets: are stablecoins the solution?” and proposes a classification of stablecoins based on different key concepts used to keep their value stable.

Four major types of stablecoins outlined

Specifically, the ECB outlined four major types of stablecoins including those specified as tokenized funds, off-chain collateralized stablecoins, on-chain collateralized stablecoins and algorithmic stablecoins.

54 stablecoins totally $4.8 billion in July 2019

According to the ECB’s data, there are at least 54 existing stablecoin projects, with 24 of them being operational. The total market capitalization of stablecoin initiatives almost tripled from €1.5 billion ($1.7 billion) in January 2018 to over €4.3 billion ($4.8 billion) in July 2019, while the average volume of stablecoin transactions was €13.5 billion per month within the period between January and July 2019.

Tokenized funds are the most popular stablecoin type, accounting for almost 97% of the monthly volume of all other stablecoin initiatives, according to the ECB.

Classification of 54 active stablecoin initiatives

Classification of 54 active stablecoin initiatives

Uncertainties in the field pose major risks

In the report, the ECB emphasized existing uncertainties in governance and regulatory treatment of stablecoin projects. Specifically, the bank wrote that stablecoin adoption may require improvements to its governance, including the processes of updating the smart contracts at the core of the project.

On the other hand, stablecoins with a clear governance framework are also at risk as far as they may “nevertheless be hampered by the uncertainty relating to the lack of regulatory scrutiny and recognition”, which is specifically relevant in the event that financial institutions use the same tech for recording of traditional assets. In that situation, stablecoins would be redundant in the use of DLT outside crypto-asset markets, the bank concluded.

In July 2019, an official at the ECB raised concerns over stablecoins use, claiming that there is no reason to be alarmed but there is reason to be vigilant with stablecoins.

Swiss National Bank President Says Stablecoins Could Hamper Policy

Swiss National Bank (SNB) President Thomas Jordan said that stablecoins pegged to foreign currencies could hamper Switzerland’s monetary policy in some circumstances.

Cryptocurrencies’ limited use as payment instruments

On Sept. 5, Jordan spoke at the University of Basel, saying that he is convinced that cryptocurrencies are of limited use as payment instruments, stores of value and units of account, as they are subject to major fluctuations. Jordan went on to say:

“Crypto tokens are more like speculative investment instruments than ‘good’ money in terms of their characteristics. Users typically describe money as ‘good’ if it has a stable value over time, is broadly accepted, and enables efficient payments. Given these parameters, it seems unlikely that crypto tokens will be widely used as money in Switzerland.”

Jordan further expressed his concerns in regard to stablecoins pegged to foreign currencies establishing themselves in Switzerland. He explained:

“If stable coins pegged to foreign currencies were to establish themselves in Switzerland, the effectiveness of our monetary policy could be impaired.”

The central banker added that a Swiss franc stablecoin would have “no immediate impact on the effectiveness of our monetary policy”, but also said that giving the general public access to a central bank-issued digital currency could pose a threat to financial stability by increasing the likelihood of a bank run.

Swiss National Bank keeps a close eye on Facebook’s Libra

As Cointelegraph previously reported, the central bank is in close contact with the relevant authorities over Facebook’s Geneva-based crypto project Libra. SNB vice-chairman Fritz Zurbruegg said that it was still difficult to analyze the Libra project fully, citing the vague character of available documentation.

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