As the European Central Bank considers the possibility of launching a digital euro, it is also looking at the risks associated with the use of stablecoins within the current financial system and markets, and how it would affect European monetary policy.
In a report Recently published, the European Central Bank (ECB) analyzes the potential impact that can be brought about by the use of stablecoins (stablecoins) for monetary policy, financial stability, financial markets, payment infrastructure and for banking supervision within the Eurozone. The study was carried out by the ECB through the Cryptocurrency Working Group, who based his analysis of stablecoins on three scenarios: as a complement to the current financial model, as a payment system and as a store of value.
According to the report, a stablecoin, such as a CBDC As an alternative to private digital currencies, it can be the ideal complement to the current financial system, without representing major risks or concerns for central banks or the financial industry in general. However, stablecoins, from other scenarios, such as a payment system and as a store of value, do involve potential risks that call into question the power of central banks to control their own monetary policy.
The ECB says that the popularity that stablecoins may gain can cause a significant change in the use of fiat money as we know it. Hence the urgent need for regulations, supervision and monitoring necessary to efficiently manage all these risks. In the Eurozone, the ECB and other entities must continue to monitor the evolution of the stablecoin and other asset markets, in order to respond effectively to the rapid and constant changes that digital transformation implies in all possible scenarios.
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Stablecoin, a “misleading” term to be defined
The ECB considers stablecoins to be a “relatively recent payment innovation” whose potential is still being studied and developed. Because of this, there is currently no clear terminology that actually defines what a stablecoin is, its meaning or its potential, but rather the term can be presented as a confusing, and even misleading, element for those who are just starting out in the debate on new technological phenomena. Even so, the ECB considers stablecoins to be a digital unit of value, which can be used to make transfers and deposits as digital and electronic money. But it is far from accepting that these currencies have the particularity of guaranteeing a stable price that provides security and stability to holders and users.
“As regulatory principles are established and approaches defined, the term ‘stablecoin’ should be replaced by a choice of terminology to shift the emphasis away from the issuer’s promise of stability.”
The bank believes that a change in the term stablecoin will prevent consumers from running the risk of being confused by the name. Likewise, the ECB also points out that it is the establishment that these currencies have within the financial system that will define their possible risks and implications. For example, new initiatives are born every day that aim to promote the use and adoption of stablecoins. Initiatives that, in addition to stimulating the adoption of stablecoins, also increase the implications of these currencies within current monetary policy.
If stablecoins are adopted as a complement to existing financial instruments, they can be seen more as currencies that would complement traditional money, although the entity aims at a proprietary option and not at private stablecoins. On the contrary, if they are positioned above these instruments, as currencies that are much more convenient, easy and safe to use, they can lead to risks and negative implications that affect financial stability.
Risks and implications of stablecoins
The ECB notes that stablecoins are vulnerable to liquidity “runs,” meaning the risks of “runs” on stablecoins are potentially greater on these currencies than on typical banking instruments.
“When a stablecoin is exchanged for the market value of its collateral, a run could occur if end users are faced with the prospect that the coin’s collateral may become worthless. Mass withdrawals could also occur in the case of an agreement that guarantees redeemability at face value, if the stablecoin’s sponsor is perceived as lacking sufficient capacity to absorb losses.”
In these events, the massive withdrawal or liquidation of assets to cover redemptions and losses could have a negative effect on the financial system. The same risk scenario could arise if stablecoins are adopted as a payment and value transfer system, a scenario that the ECB sees as more likely in the long term for stablecoins than as a store of value. According to the entity, the risks are associated with the design of the new payment systems that use these currencies, such as their legal basis, governance or decentralization, level of security, operational complexity, among others.
Likewise, as a value transfer system, stablecoins may challenge the ability of banks to operate, especially due to new monetary policies, which involve negative interest rates that compete against the profitability of an interest-free stablecoin. In this scenario, it is evident that the adoption of stablecoins will affect and hinder the implementation of these interest rates. For its part, the ECB also pointed out the governance structures of digital protocols as a possible obstacle to the future development of projects, as well as the dependence on intermediaries and trusted third parties.
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