The European Central Bank (ECB) has released a report analyzing the development of the cryptocurrency market over the past decade and the risks it poses to the existing financial system. The report says stablecoins are not practical as a mode of payment and their current form isn’t fit for use in the real economy.
A section of the report devoted to stablecoins discussed the central role that it plays in the current ecosystem. Stablecoins are gradually used to interlink various blockchain networks and play a critical role in offering liquidity to the decentralized finance (DeFi) ecosystem.
The report further scrutinized whether these stablecoins could find a place in the traditional financial system, but decided that a lack of regulatory oversight added to the recent downfall of algorithmic stablecoins ecosystems such as Terra shows the contagion effects such stablecoins could have on the financial system. An excerpt from the report read:
“The largest stablecoins serve a critical function for crypto-asset markets’ liquidity, this could have wide-ranging implications for crypto-asset markets if there is a run-on or failure of one of the largest stablecoins.”
Even centralized stablecoin Tether (USDT) lost its peg for a while and saw nearly 10% in outflows other than the algorithmic stablecoins that faced the crisis during the crypto market crash in May,
The ECB also shot down the idea of using stablecoins as a means of payment, demanding these are not practical as the speed and cost as well as their redemption terms and conditions have proven “inadequate for use in real economy payments.”
The ECB suggested appropriate supervisory and regulatory measures to confirm stablecoins don’t pose a risk to financial stability in European countries. Though, the report did note that stablecoin infiltration in the region is limited given that European payment service providers have not been very active in stablecoin markets thus far.
The European Union lately accepted the markets in the crypto-Assets (MiCa) outline that offers guidance for crypto asset service providers (CASPs) to operate within the Europe region. The temporary agreement includes rules that will cover issuers of unbacked crypto assets, stablecoins, trading platforms, and crypto-wallets.
The ECB intends to restrain stablecoin issuing to e-money institutions and acclaim institutions to ensure that a Terra-like incident doesn’t lead to investors losing billions of dollars.
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