The highest banking authority in Italy has called for a “robust, risk-based” regulatory framework for stablecoins, which could prevent the worst-case scenario — a “run” on stablecoins.
In its recently released “Markets, Infrastructures, and Payment Systems” report for the month of June, the central bank urged regulators to apply the same financial standards of conduct to stablecoin issuers as they do to other industry participants.
Bank of Italy is calling for closer regulator scrutiny of stablecoins
Since the collapse of Terra Luna, Stablecoins have become a heavy conversation for regulators. The bank of Italy stated that the rise of crypto and DeFi markets, coupled with multiple “boom and bust cycles” in a largely unregulated environment, has resulted in “significant consumer harm.”
The bank of Italy stated that regulatory focus on stablecoin issuers should be a priority due to their close relationship with DeFi. The Italy’s leading Bank said:
A robust, risk-based regulation of stablecoins ensuring the prevention of ‘runs’ on their issuers is a necessary condition to reduce the fragility of the DeFi ecosystem, given the prominent role of this asset class in decentralized finance. […] It is crucial that policy interventions on stablecoins and DeFi are well synchronized since the diffusion of stablecoins […] is likely to spur new waves of DeFi innovation and increase the interconnection between traditional and decentralized finance.
The central bank of Italy.
The Italian banking authority also noted that stablecoins “have not proven to be stable at all,” citing the collapse of Terra’s algorithmic stablecoin TerraClassicUSD (USTC) in May 2022 as the most notable example.
Central Bank of Italy calls on the industry to debunk “the decentralization illusion”
The bank stated that the industry must also dispel “the decentralization illusion” by recognizing that the majority of decentralized protocols are run by primary stakeholders who can frequently “extract ownership benefits.” The bank added that “Such projects should be brought back to traditional, accountable business structures as a pre-condition for operating in the regulated financial sector.”
However, the bank of Italy emphasized that it is not necessary to regulate every cryptocurrency asset or activity. This is a first of its kind in crypto regulation considering that the entire crypto industry has been in tough regulatory waters fron the American SEC. The bank added that:
Not all crypto activities and not all forms of crypto-assets need to be covered or should be covered by financial sector regulation, in particular where their issuance, trading and holding do not serve customers’ financial needs through a payment or investment function.
The central bank of Italy.
Non-financial use cases enabled by blockchain include decentralized identification, real estate, supply chain, voting, and carbon credits. Because the technology functions across national borders, Italy’s central bank has also urged for countries to collaborate and build an international regulatory framework.
Hester Peirce joins in in that the US crypto laws can’t assume ‘everything is a financial asset’
On June 29, Commissioner Hester Peirce – dubbed “Crypto Mom” — stated that crypto regulations in the United States should be “reserved” and that the technology should not be regulated as if every application is financial. While crypto is commonly thought of in “very financial terms,” Peirce emphasized that it has other applications, such as allowing people to engage without requiring a centralized institution.
I think we have to make sure that whatever regulatory framework you have doesn’t just assume that everything is a financial asset. […] That’s useful in the financial context, but it’s also useful in building a social media platform or whatever else.
Hester Peirce
Peirce believes that a legal framework should adopt a “reserved approach” but provide “sufficient clarity so that people feel free to experiment.” She added that “There is something to be said for not putting a framework in place that is so inflexible that it doesn’t accommodate the new uses of crypto and blockchain.”
In an apparent jab at the SEC’s current approach, which has been criticized by many, including Peirce, the commissioner stated that the statutes “can’t be reserved then, all of a sudden, [regulators] come in five years later with a bunch of enforcement actions.”
Peirce, when asked about her crypto advocacy, stated that the SEC “can do better” and that if she cannot speak freely, “then I don’t know why I’m in that position.”
