According to the latest findings explained in a detailed report, ECB says that Stablecoins are not suitable for usage in the actual economy and are not effective as a form of payment. Research by the European Central Bank (ECB) examines the expansion of the cryptocurrency industry over the past ten years and the threats it poses to the current financial system.
The key role that stablecoins play in the present ecosystem was covered in a section of the paper devoted to the topic. Stablecoins play a crucial role in providing liquidity to the decentralized finance (DeFi) ecosystem and are increasingly used to connect multiple blockchain networks.
The report went on to examine whether these stablecoins could fit into the established financial system but came to the conclusion that the recent failure of algorithmic stablecoin ecosystems like Terra, combined with a lack of regulatory oversight, points to the potential collapse effects these stablecoins could have on the market.
When the cryptocurrency market crashed in May, it wasn’t just the algorithmic stablecoins that were in trouble; even the centralized stablecoin Tether (USDT) temporarily lost its peg and experienced outflows of about 10%.
Stablecoins are a possible threat to the stability of the financial system
According to the report, the Financial Stability Board (FSB) and ECB’s most recent investigation reveals that the size and makeup of the crypto-asset markets are changing rapidly. If current trends continue, crypto assets will be a threat to the stability of the financial system.
Therefore, it is important to adequately control and regulate the markets for crypto assets. In the absence of prompt regulatory intervention, disruptions in marketplaces where crypto-assets are employed could have an impact on regulated financial markets.
Stablecoins were also rejected by the ECB as a viable payment option, citing that their speed, cost, and redemption terms and conditions have shown them to be “insufficient for use in real economy payments.”
To ensure that stablecoins don’t endanger the financial stability of European nations, the ECB suggested the implementation of the proper supervisory and regulatory measures. However, the report did point out that stablecoin market penetration in the region is limited as a result of the lack of significant activity in stablecoin markets by European payment service providers.
The ECB wants to limit stablecoin issuance to e-money institutions and credit institutions, to prevent a Terra-like occurrence from costing investors billions of dollars.