It has been over 20 years since the European Union introduced its borderless currency, the Euro. The benefit of having a currency that can span different borders within the Union is huge and also quite revolutionary for the time.
However, being faced with another revolution of borderless money, the European Central Bank has expressed concerns over the notion of global stablecoins. However, European Central Bank (ECB) board member Benoit Coeure has warned that global stablecoins remain untested and raise potential risks across multiple policy domains.
The concerns about stablecoins are not unwarranted. However, there are some issues that are being raised that can miss the point. Still, to Coeure’s credit, the thoughts are that stablecoins do need a higher degree of regulation in this ever-expanding cryptocurrency world.
Stablecoins offer the borderless benefits of cryptocurrency but mitigate the fear of volatility that often comes with backing something like Bitcoin. They are also a useful way to tokenize and digitize fiat currency in order to make payment and money moving more frictionless.
However, the concerns being raised by the ECB have also cropped up in the USA’s Federal Reserve. The Fed has said, especially in connection with Libra, one of the most publicized stablecoin projects, that there could be issues with liquidity.
Essentially, the biggest concern surrounding the Feds view on stablecoins is that if something goes wrong with them, be it in relation to operations, liquidity, or credit – “This loss of confidence could lead to a run,” the report said.
“In an extreme scenario, holders may be unable to liquidate, with potentially severe consequences for domestic or international economic activity, asset prices, or financial stability,” it added.
For the ECB and Coeure, his concerns are more general and also caveats that if these stablecoins are to permeate, then they need to be heavily regulated.
“Global stablecoin arrangements raise potential risks across a broad range of policy domains, such as legal certainty, investor protection, financial stability, and compliance with anti-money laundering requirements. Public authorities have made clear that the bar will be set very high for these stablecoin initiatives to be allowed to operate,” Coeure said.
The concern from these regulators is grounded, but it is frustrating for a new and innovative financial system to face such hurdles in its evolution. Many in the cryptocurrency community see it as interference, but the fact that these stablecoins have not been tested on a broad scale – especially in Libra’s case – could lead to huge collapses.