Stablecoins, increasingly an integral part of the digital financial ecosystem, have become the subject of a compelling discourse among leading banking authorities worldwide. The apex banking authority of Italy recently emphasized the need for a robust, risk-oriented regulatory framework for stablecoins. This crucial move attempts to avert potential adverse scenarios such as stablecoin ‘runs’.
A Clarion Call for Levelled Standards in Financial Conduct
In its recently published “Markets, Infrastructures and Payment Systems” report for June, the Italian central bank makes a persuasive call to regulators. It urges that the same standards of financial conduct applied in traditional banking be extended to stablecoin issuers within the crypto space.
The bank pinpoints the rise of cryptocurrencies and the subsequent “boom and bust cycles” in an often-uncharted regulatory environment, attributing them to substantial consumer harm.
The focus on stablecoin issuers becomes crucial due to their intimate connection with Decentralized Finance (DeFi). The banking authority asserts:
“The importance of a robust, risk-based regulation of stablecoins to prevent potential ‘runs’ on issuers is indisputable. This approach is essential in minimizing the fragility of the DeFi ecosystem, considering the significant role this asset class plays in decentralized finance.”
Furthermore, it emphasizes the need for harmonized policy interventions in stablecoins and DeFi. The proliferation of stablecoins could drive waves of innovation in DeFi, increasing the interconnection between traditional and decentralized finance systems.
Questioning Stablecoin Stability
However, the Italian banking authority contends that stablecoins have yet to prove their stability – a point underscored by the notable collapse of Terra’s algorithmic stablecoin in May 2022.
The banking institution also casts a critical eye on the perceived decentralization of most protocols. It acknowledges that core stakeholders often operate these protocols and can frequently “extract ownership benefits.” It posits that these projects should adopt conventional, accountable business structures as a prerequisite for operating within the regulated financial sector.
Balancing Regulation with Crypto Asset and Activity Diversification
While emphasizing stablecoin regulation, the bank clarifies that not all crypto activities or assets must be subjected to financial services regulation. Specifically, those not serving customers’ financial needs through a payment or investment function may not require extensive oversight.
Non-financial use cases enabled by blockchain, such as decentralized identification, real estate, supply chain management, voting, and carbon credits, can function independently of strict financial regulation.
Call for International Cooperation and Regulatory Harmonization
The Italian central bank also advocates for international cooperation to establish a regulatory framework that transcends national borders, reflecting the technology’s global nature.
The evolution of stablecoins presents both significant opportunities and challenges, requiring a delicate balance between fostering innovation and ensuring consumer protection. Regulatory authorities must address these issues in their entirety to ensure the healthy progression of this pivotal financial instrument.
