A recently published ECB paper on stablecoins shows how malfunctioning stablecoins can pose a severe threat to global economic security. A paper published by the European Central Bank highlights how stablecoins, if launched without many insights, can threaten traditional financial systems and lead to destabilization of economies.
Stablecoins provide an alternative to other, more volatile crypto-assets, but they can fall under very different regulatory regimes. Global stablecoins would need a robust regulatory framework as they could pose a risk to financial stability. Read more https://t.co/mdfAGS2LZm pic.twitter.com/Z5yApMJxC9
— European Central Bank (@ecb) May 5, 2020
The ECB paper explains how stablecoin projects, including Facebook Libra, have unnerved numerous financial watchdogs to study their benefits and disadvantages. Moreover, many countries put in place suitable restrictions to regulate their launches to avoid any unnecessary financial complications. Also, most states have strict compliance standards already in place to ensure risks are mitigated well before launch.
ECB paper on stablecoins exposes chinks in the stablecoin armor
Stablecoins pose a whole different range of issues when it comes to regulation. Financial regulators often have to enact a torrid of complicated arrangements consisting of myriad operational partners and legal entities to ensure smooth compliance. Unlike traditional finance, stablecoins requires a complex maze of regulatory and compliance mechanisms, says ECB paper on stablecoins.
For example, asset management features of stablecoins are usually covered as per existing regulations. However, many other facets pertaining to a stablecoin’s asset management cannot be covered using formal mechanisms. Whether or not the users can claim the asset pegged to the stablecoin or not is a question that often perplexes the watchdogs.
Stablecoins must be compliant, or otherwise, they risk financial threat
The ECB paper on stablecoins further says that since the word contains ‘stable,’ the investors often assume that these assets have suitable backing and represent a stable asset. Such an assumption often causes them to ignore the various risks associated with a stablecoin, their payments, and transaction features.
The paper highlights how unregulated stablecoins launch can bring all these risks to the fore at an unprecedented scale. It would be too late before authorities realize how to handle the risks. ECB further mentions that stablecoin promoters must ensure that they are fully compliant with all the legal and technical aspects of the stablecoin well before launch. Regulations, both domestic and international, must be fully adhered to. Financial regulators must also build a suitable framework to avoid unnecessary scenarios.
