Stablecoins Vulnerable to Regulatory Uncertainty: European Central Bank

Stablecoins with a clear governance framework may be hampered by the uncertainty of the lack of regulation, according to the European Central Bank (ECB).

On Aug. 29, the ECB released a new paper devoted to stablecoins, which it describes as digital units of value that are not a form of any specific currency but rather rely on a set of stabilization tools in order to minimize fluctuations in their price.

The ECB’s paper is called “In search for stability in crypto-assets: are stablecoins the solution?” and proposes a classification of stablecoins based on different key concepts used to keep their value stable. Specifically, the ECB outlined four major types of stablecoins including those specified as tokenized funds, off-chain collateralized stablecoins, on-chain collateralized stablecoins and algorithmic stablecoins.

According to the ECB’s data, there are at least 54 existing stablecoin projects, with 24 of them being operational. The total market capitalization of stablecoin initiatives almost tripled from €1.5 billion ($1.7 billion) in January 2018 to over €4.3 billion ($4.8 billion) in July 2019, while the average volume of stablecoin transactions was €13.5 billion per month within the period between January and July 2019.

Tokenized funds are the most popular stablecoin type, accounting for almost 97% of the monthly volume of all other stablecoin initiatives, according to the ECB.

In the report, the ECB emphasized existing uncertainties in governance and regulatory treatment of stablecoin projects. Specifically, the bank wrote that stablecoin adoption may require improvements to its governance, including the processes of updating the smart contracts at the core of the project.

On the other hand, stablecoins with a clear governance framework are also at risk as far as they may “nevertheless be hampered by the uncertainty relating to the lack of regulatory scrutiny and recognition,” which is specifically relevant in the event that financial institutions use the same tech for recording of traditional assets. In that situation, stablecoins would be redundant in the use of DLT outside crypto-asset markets, the bank concluded.

In July 2019, an official at the ECB raised concerns over stablecoins use, claiming that there is no reason to be alarmed but there is reason to be vigilant with stablecoins.

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