The European Central Bank has stated that stronger regulatory control of stablecoins is “urgently” needed before they pose a threat to the integrity of the financial system.
The ECB stated in a macroprudential report released on Monday that “Financial stability risks from stablecoins are currently still limited in the euro area, but if growth trends continue at their current pace, this may change in the future,”
The institution warned that if a major stablecoin failed, there might be significant spillover because certain stablecoins already play important roles in supplying crypto markets with liquidity. Additionally, if connections between digital assets and the established financial system keep growing, there could be “contagion effects.”
After the meltdown of the TerraUSD token in May, which the ECB claimed demonstrated that “stablecoins are anything but stable” stablecoins have come under increased scrutiny. Shortly after TerraUSD’s demise, Tether, the biggest stablecoin, suddenly lost its peg to the dollar.
An international group of regulators, government representatives, and central bankers were known as the Financial Stability Board stated earlier on Monday that widely used stablecoins must “be held to high regulatory and transparency standards, maintain at all times the reserves that preserve stability of value, and meet relevant international standards.”
Stablecoins are digital assets that are intended to have a consistent value. They are often anchored to a recognized currency, like the US dollar. Policymakers are particularly worried that the failure of a significant asset-backed stablecoin could lead to a fire sale of the traditional financial instruments that serve as its collateral, such as commercial paper.
