ECB calls for stablecoin regulations to protect wider economy

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The European Central Bank (ECB) is urging the European Union to push ahead with cross-border stablecoin regulations, drawing particular attention to their increasing influence across digital assets markets.

In a recent bulletin, the ECB acknowledges that while crypto markets are siloed from the broader economy, there exists the potential for systemic risks as stablecoins continue to grow.

The publication also highlights the need for international standards for stablecoins and says it’s seeking cross-border consistency because stablecoins can cross international borders within seconds.

Presciently, the bulletin also warns rule-makers against making premature assumptions. In particular, it warns readers against assuming that sectors or areas of the economy will remain unaffected by stablecoins. As the popularity of stablecoins grows, writes the ECB, they could soon start to affect all industries.

Half of all BTC and ETH trades already involve stablecoins

The ECB highlighted the importance of stablecoins in providing liquidity across digital asset markets. Today, most crypto traders use stablecoins like Tether and USD Coin as stand-ins for fiat.

Indeed, at present, millions of people use stablecoins for preserving purchasing power, inter-exchange transfers, denominating derivatives, or buying other digital assets. In fact, the ECB estimates that half of all bitcoin and Ethereum trades already involve stablecoins.

And if the world’s crypto exchanges report truthful data via their application programming interfaces (APIs), the vast majority of crypto transactions (including derivatives and all altcoins) are denominated in stablecoins.

Stablecoins are becoming systemically important.

Read more: History of Tether’s peg: Every time USDT traded above or below one dollar

Not actually backed 1:1 with dollars

The main problem with USD stablecoins’ growing popularity is that none are wholly backed by dollars. Instead, every stablecoin issuer buries its backing promises in lengthy legalese, arcane documents, and website subpages.

Worse, these issuers update their backing promises over time. Famously, Tether modified its language from its original promise to retain one dollar in its bank account for every Tether (USDT). After the New York Attorney General found that promise to be a lie, Tether now promises to back USDT with assorted assets.

Other stablecoins have failed entirely, including terraUST, Basis, Himalaya Dollar, Titan, and dozens of other stablecoins. Even major stablecoins de-peg with frequency. Tether, for example, has de-pegged dozens of times — and once traded below a penny.

Stablecoin regulations could prevent contagion

Some crypto insiders are concerned that unregulated stablecoins could ultimately collapse. In its bulletin, the ECB warns that a meltdown in a top five stablecoin could spill over to impact the mainstream financial sector. The bank cited a relatively new consortium of FDIC-insured US banks who have expressed interest in issuing a stablecoin called USDF. The consortium aims to use blockchain and the USDF token to reduce the costs of interbank transactions.

The Financial Stability Board expressed similar concerns in a statement issued on July 11, 2022, calling for the regulation of stablecoins as part of a larger scheme for international regulation of digital assets.

Not only that, the ECB also said that poor frameworks for stablecoin regulation have already caused business uncertainty among mainstream entities like payment processors. Most payment service providers in Europe have limited stablecoin-related services.

The bank also cited variations in transaction speeds between blockchains. Stablecoin issuers frequently use the Ethereum blockchain as an initial base for their tokens, however, some stablecoins have moved away from it. Other blockchains can be faster or cheaper, but they achieve those feats with security trade-offs.

The ECB’s bulletin concluded with support for an existing European Union proposal to regulate digital asset markets. It called the regulation of stablecoins an urgent matter for financial stability. The best way to mitigate contagion risk, it says, is unified enforcement of international stablecoin regulations.

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