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Malfunctioning stablecoins could hit financial stability - ECB paper

Malfunctioning stablecoins could hit financial stability - ECB paper

If a stablecoin, such as Libra, reaches a global scale, any malfunctioning could pose a risk to financial stability, warns a European Central Bank paper.

The Facebook-led Libra project has caused watchdogs to scramble to investigate the benefits and risks of global stablecoins and how they should be regulated.

The ECB paper notes that one of the problems for regulators is that stablecoins are "complex arrangements comprising many interdependent functions and legal entities".

The paper focuses on the asset management function of stablecoins, noting that, depending on their specific design features this could be covered by existing regulations.

However, the technological, legal and operational specificities of stablecoins also allow for the asset management function to not be covered by current rules, opening up the question of whether end users have a formal claim on the assets backing the stablecoin.

With stablecoins, by their very name, promising stability, retail clients could assume that their holdings are as safe as bank deposits, says the paper.

However, "such a perception would underestimate the risks that are involved in what is effectively an investment in financial assets with payment and transfer functions attached".

If the stablecoin reaches a global scale, a sudden realisation of these risks could trigger "systemic consequences".

Therefore, the paper urges stablecoin promotors to design their efforts to ensure they comply with existing regulations, such as the EMD, the Ucits Directive and AIFMD. If not, a new regulatory framework will have to be put in place to avoid a vacuum.

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