European Central Bank Says Stablecoins Present Concerns

Use of the digital currencies are limited in the region, but the coins still merit close oversight, the bank said Monday (Nov. 24) in initial findings from its pre- financial stability review, which is set to be published Wednesday (Nov. 26).

“Stablecoins are experiencing rapid growth, pushing their market capitalization to new all-time highs,” the report said. “From a financial stability perspective, this may raise concerns arising from certain structural weaknesses inherent to stablecoins and their interconnectedness with traditional finance.”

Stablecoins’ main vulnerability is that investors lose confidence that they “can be redeemed at par,” the report added, which can trigger a run on a stablecoin and cause them to lose their peg.

Given the importance of stablecoins in the crypto ecosystem, a large adverse stablecoin shock would be detrimental for crypto markets.

“However, other market segments could also be affected through spillovers and second-round effects, including those arising from wealth effects and interconnections with traditional finance,” the ECB added.

The report also examines stablecoins’ use in cross-border payments. While research shows more than 70% of stablecoin flows are cross-regional, the ECB says there is a lack of hard evidence of their use “systematically for remittances and other cross-border transactions.”

The bank says that its data suggests that the retail use of stablecoins represents a small share of total stablecoin volumes, with around 0.5% of volumes are organic retail-sized transfers.

“In conclusion, the use of stablecoins seems to be primarily driven by their role within the crypto-asset ecosystem, and it remains to be seen whether stablecoins will be adopted widely across other use cases,” the ECB said.

The findings come amid a wave of concerns from regulators regarding stablecoins. For example, Reserve Bank of India Governor Sanjay Malhotra said in a speech last week that his organization — India’s central bank and banking regulator —  was “adopting a very cautious approach” toward cryptocurrencies, stablecoins included.

Also last week, the Financial Stability Board announced plans to increase its focus on stablecoins and nonbank financial intermediation (NBFI), two areas that it said could pose risks in the global financial system.

“Stablecoins may improve payment speed and efficiency, but they raise a number of vulnerabilities, including run risk and regulatory challenges associated with multi-jurisdiction issuers of stablecoins, which require continuing attention,” the FSB said in a news release.