- The ECB thinks that the term "stablecoin" is confusing and misleading.
- It also thinks that stablecoins could have negative effects on financial stability.
- That's unless it can regulate them appropriately.
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The European Central Bank said today that the term “stablecoin” can be “confusing, even misleading.” That’s because there are different types of stablecoins, said the bank, which use different stability methods to maintain their price. What’s more, these cryptocurrencies are vulnerable to attack, and their widespread adoption could break the global markets, its Crypto-Assets Task Force wrote in a paper, published today.
The European Central Bank researchers identified three types of stablecoins. First up are stablecoins such as Tether: crypto-simulacrums of fiat equivalents that let you trade US dollars without leaving the crypto-ecosystem. Then there are stablecoins that are used to replace fiat currencies, such as digital euros or dollars. And, finally, there are the stablecoins that are used as alternative stores of values (i.e. holding Tether as a store of value for the US dollar).
But the second kind—this digital euro idea, and the one that the ECB is contemplating—could “give rise to financial stability risks” if its use became widespread and its integration within the financial markets tangled beyond repair.
“Financial stability risks” doesn’t sound stable at all.
This, claims the ECB, could occur because of a “liquidity run.” The idea is this: put up some regular, fiat euros as collateral for some digital, crypto-euros (a la Tether). If its holders believed that the actual euro would lose its value, then people would redeem their crypto-euros for the real euros and dump the real ones on the market.
“In these events, the liquidation of assets to cover redemptions could have negative contagion effects on the financial system,” said the researchers in the report. Widespread stablecoins, such as Tether or USDC, could also cause systemic risk, given that it is prone to manipulation, among other things.
And if a stablecoin became an alternative store of value, which the ECB considers “less plausible,” this would reduce the ability of a central bank to intervene in markets through monetary policy.
Put another way: the European Central Bank believes that stablecoins, in general, could have wide-ranging negative impacts on the economy.
The bank also thinks that the nebulous term ought to be abandoned altogether: “As regulatory principles are established and approaches are defined, the term ‘stablecoin’ should be replaced by a choice of terminology to shift the emphasis away from the issuer’s promise of stability.”