Carolynn Look
Stablecoins must “urgently” be brought under increased regulatory oversight before they can become a risk to financial stability, according to the European Central Bank.
“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 ECB said in a macroprudential bulletin published Monday.
The institution said that with some stablecoins already playing critical roles in providing crypto markets with liquidity, there could be significant spillover should a large stablecoin fail. It also warned of “contagion effects” if links between digital assets and the traditional financial system continue to expand.
Read more: Bitcoin Faces Another 50% Drop, Wall Street Says: MLIV Pulse
Stablecoins have come under increasing scrutiny after the meltdown of the TerraUSD token in May, an episode which the ECB said showed that “stablecoins are anything but stable.” Tether, the largest stablecoin, briefly lost its peg to the dollar shortly after TerraUSD collapsed.
Earlier on Monday, the Financial Stability Board -- an international body of regulators, government officials and central bankers -- widely adopted 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.”
Read more in our QuickTake: What Are Stablecoins? Why Did TerraUSD Collapse?
Stablecoins are digital assets designed to hold a steady value, typically pegged to an official currency like the US dollar. A chief concern among policy makers is that the collapse of a major asset-backed stablecoin could trigger fire sales of traditional financial instruments they’re backed by, such as commercial paper.
