The European Central Bank’s Crypto-Assets Task Force (CATF) has released a report on stablecoins that hones in on the potential implications they may have on future monetary policy and financial stability.
The report contains an overview of stablecoins from the standpoint of the ECB, while a disclaimer at the beginning of the document outlines that the report may not necessarily reflect the views of the ECB but of the authors.
Three scenarios highlighted
The executive summary of the document describes stablecoins as a relatively recent payment innovation while suggesting that prevailing terminology may “be a confusing, even misleading, element in the discussion surrounding new technological phenomena.”
The CATF identifies the fact that different stablecoins have emerged over the past few years which means that there is some variance in the ways in which these ‘digital units of value’ stabilise their price based on the specific stabilizing tool or underlying asset that the stablecoin is tied to.
The report then outlines three different scenarios which may have a direct effect on the adoption and future use of stablecoins across the world. Firstly stablecoins could provide a “crypto-assets accessory function” which allows users to secure cryptocurrency trading revenues by shifting value into a stablecoin, cutting out the need to leave the cryptocurrency ecosystem.
Secondly the CATF suggests that stablecoins could become a “new payment method”, before highlighting the third scenario which could see stablecoins become an alternative ‘store of value’ for users.
“These scenarios depend on the specific features of stablecoins – the second and third scenarios are reliant on stablecoin types that offer high levels of price stability and credible redemption policies – and on key drivers for their adoption.”
Possible financial risks
There are some financial risks that are highlighted in the CATF report that could be exacerbated by an uptick in the amount of people using stablecoins.
When considering the second scenario mentioned above, it is possible that a stablecoin becoming a widely-used ‘new payment option’ could have some financial stability risks.
“Stablecoins are vulnerable to liquidity “runs”. Where a stablecoin is exchanged/redeemed at the market value of its collateral, a run could occur if end users are confronted with the prospect that the stablecoin’s collateral may lose its value. Runs could also occur in the case of an arrangement that guarantees redeemability at face value – if the stablecoin sponsor is perceived as lacking sufficient loss-absorbing capacity. In these events, the liquidation of assets to cover redemptions could have negative contagion effects on the financial system.”
The likelihood of the Euro being challenged by the possibility of a ‘store of value’ stablecoin emerging is fairly low according to the CATF report. However if this does become a reality, there may be ‘negative impact on price formation, collateral valuation, money market functioning and the monetary policy space.’
Managing potential threats
While it seems that there is a low likelihood of stablecoins directly challenging the status quo of banks and the traditional financial sector, the document also outlines ways in which the ECB can mitigate the scenarios outlined in its report.
Firstly the Eurosystem’s oversight framework will include stablecoins that qualify as payment systems. It will also review the existing framework for payment instruments to include electronic systems that empower users to send and receive value independently.
The report also calls for ‘internationally coordinated regulation and cooperative oversight and supervision’ for the oversight of stablecoins.