European Central Bank (ECB) Highlights Major Loopholes in Current Stablecoin Regulations
- European Central Bank (ECB) has been spooked by the gapping loopholes in their Stablecoin regulations.
- They have acknowledged that due to the different nature of the various stablecoins they may fail to fall under their current regulatory framework.
ECB’s recent remarks on stablecoins, highlight major gaps in their regulations. They're of the opinion that the industry needs to address regulatory concerns if they are to enjoy any of the benefits that emanate from stablecoins.
The increased adoption combined with Europe’s high appetite for crypto assets, ECB’s in-depth report is a push to update their current framework for crypto-asset regulations to ensure there isn’t any regulatory void.
An Alternative to Volatile Crypto Assets.
Stablecoins offer a viable alternative to investors that may not want to put their money into volatile crypto assets like Bitcoin.
A stablecoin arrangement will instead seek to reduce volatility by transferring its value from assets or a basket of currencies pegged to the coin. They have also been popularized by the fact that they are fast and cheap as payment methods and transferring value.
The ECB was, however, quick to note that due to the diverse nature of the stablecoins, there has emerged another regulatory crunch. The intimate features of the stablecoins may end up fitting into multiple classifications or none at all. Notably stablecoins being backed by fiat currencies while others are pegged on precious stones and crypto-assets.
“Depending on its design, the stablecoin’s asset management function may, however, also fall outside of the EU’s existing regulatory framework”
Libra as a Use Case
They pointed out at Libra’s high probability of morphing to a global stablecoin, citing the intensity of their backing.
If it were to be adopted by giant social media platform Facebook it would be with a massive 2.4 billion user base with 10% of the users stemming from Europe. The ECB have then estimated that Libra’s reserve could potentially amass $3 trillion with 300 billion (10%) from European based users.
Breaking down of such an entity could lead to financial downturns on a global scale. The other concern was the reinvestment of the proceeds from coin sales instead of being held in a vault. The ECB was particularly worried as this would affect the coin’s value depending on how the assets acquired are performing.
Saga Founder reached out for comment on the ECB article stating:
“Stablecoins, by name, suggest stability. But stablecoins, by their nature, are not so stable. Why? The value of these stablecoins is tethered to a single currency, and we have seen in recent months that single currency value can fluctuate wildly and with little warning, due to external factors.
Users are seeking more stable havens for their assets value – which is why there have been such significant inflows.
Those seeking stability need to interrogate the mechanisms which stabilise their chosen coin – other they could be risking asset value if the currency their stablecoin holding is tethered to unexpectedly fluctuates.”