European Central Bank Blames Uncertain Regulation in Stablecoins’ Vulnerability

On August 29, the European Central Bank released a new document on stable tokens, where they are characterized as digital units of value that are not a form of any particular currency, but rather rely on a set of stabilizing instruments to minimize price fluctuations.

The report called “In search for stability in crypto-assets: are stablecoins the solution?” identifies four main types of stable coins: tokenized funds, off-chain collateralized, on-chain collateralized, and algorithmic stablecoins.

According to the ECB, there are at least 54 stablecoins at the moment, and 24 of them are actively used. The total market capitalization of stablecoin initiatives almost tripled from 1.5 billion euros in January 2018 to more than 4.3 billion euros in July 2019. And the average volume of transactions with them reached 13.5 billion per month from January to July 2019.

Tokenized assets account for almost 97% of the monthly volume of all operations and remain the most popular type of stablecoins as of now.

Regulation uncertainties lead to serious risks

ECB points to the existing uncertainty in the regulatory approach towards stable cryptocurrency projects. The bank believes that the adoption of stablecoins may require some changes in its governance system, including the basic processes of updating smart contracts.

According to ECB, stable cryptocurrencies with a clear governance framework may “be hampered by the uncertainty relating to the lack of regulatory scrutiny and recognition.” This becomes especially important if the same technology is used by financial institutions for accounting traditional assets. In this situation, the bank concludes, using DLT outside the crypto-asset market will make stablecoins redundant.

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