European Central Bank Worried About Risks of Stablecoin

The European Central Bank building (right) in Frankfurt, Germany.

Europe recently announced it would implement widescale and comprehensive regulations regarding cryptocurrency by 2024. This comes just as France announced its significant progress in the creation of the EU’s first digital euro. Now, the European Central Bank (ECB) has cautioned the world of the very real risks of stablecoin, reported Cointelegraph.

The ECB noted that its worries centred on so-called “stablecoin runs”, where, on news of a bank’s insolvency, a multitude of people withdraw their stablecoin simultaneously, thus leaving the bank with a stablecoin deficit. This happens to many banks all over the world.

Ledger Insights further reported that the European Central Bank has outlined three scenarios for stablecoin use. The first is its current function as a crypto-asset accessory, where it exists as a small sum in a relatively small community. The second scenario is as a mainstream payment or as a store of value. The biggest concern is payment stablecoin may experience a run and thus lead to ruin for the global financial sector.

ECB’s warnings

Decrypt further reported that the ECB has warned that stablecoin are extremely vulnerable to attack. It added that widespread adoption of them could lead to a global financial meltdown.

The ECB believes that the widespread use of stablecoin as a form of payment, as is proposed with the digital euro, could lead to numerous problems regarding the actual fiat currency. This may cause the fiat euro to lose its actual value. Stablecoin is also very much prone to manipulation and is thus not as independent as normally thought.

Furthermore, the ECB stressed that stablecoin as an alternative store of value would reduce the role of central banks in intervening in monetary policy. It has thus described the term “stablecoin” as confusing and potentially misleading, considering there are many unstable aspects to it.

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Raïs Tarek 87 Articles
Journalist and lawyer, with a passion for global politics, economics and current affairs.