ECB Recommends Urgent Stablecoin Regulation in Light of UST’s Collapse

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Summary:

  • The European Central Bank has recommended urgent stablecoin regulation, citing UST’s recent collapse and losses faced by its holders.
  • The ECB also states that algorithmic stablecoins should be treated as unbacked crypto assets due to their risks.
  • The ECB recommends using the recently passed MiCA bill and the Financial Stability Board recommendations as a guide toward global stablecoin regulation.

The European Central Bank (ECB) has released a new report discussing the role of stablecoins within the crypto industry and beyond. According to the report, the use of stablecoins is snowballing, and so are the risks they pose to the traditional financial system.

There is an Urgent Need to Regulate Stablecoins in Light of UST’s Collapse – ECB.

The ECB report recommends an urgent regulation of the stablecoin market due to the risks demonstrated by the recent collapse of UST. It states:

Amid a general downturn in the crypto-asset markets, TerraUSD lost its peg to the US dollar on 9 May and crashed to a price below USD 10 cents after 16 May…In the specific case of TerraUSD, holders have suffered huge losses.

Appropriate regulation, supervision and oversight need to be implemented before stablecoins become a risk to financial stability and the smooth functioning of payment systems. Existing stablecoins urgently need to be brought into the regulatory perimeter, and new ones need a regulatory framework to be established.

Algorithmic Stablecoins Should be Treated us Unbacked Crypto-Assets.

Furthermore, the ECB team states that algorithmic stablecoins need to be treated as unbacked crypto-assets due to the risks their collaterals pose or some projects lacking them entirely.

It explains that there is also a need to understand that algorithmic stablecoins cannot by themselves be backed by unbacked crypto-assets such as Bitcoin and Ethereum.

Recently Passed MiCA Bill and FSB Recommendations Could be Used as a Guide Towards Global Stablecoin Regulation.

Concerning a framework on how stablecoins can be regulated globally, the ECB report highlights the recently passed Markers in Crypto Assets Regulation (MiCA) bill as a potential guide towards a global framework for stablecoin regulation.

Additionally, high-level recommendations by the Financial Stability Board published in 2020 could provide further guidance on regulating the now popular stablecoins.

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