HomeAltcoinStablecoin risk to financial stability highlighted by the Terra crash: ECB

Stablecoin risk to financial stability highlighted by the Terra crash: ECB


According to a recent ECB analysis, stablecoins are not suitable for usage in the actual economy and are not viable as a method of payment.

The expansion of the cryptocurrency market over the past ten years and the threats it poses to the current financial system have been examined in a report published by the European Central Bank (ECB).

The key role that stablecoins play in the present ecosystem was covered in a section of the paper devoted to the topic. Stablecoins play a crucial role in providing liquidity to the decentralized finance (DeFi) ecosystem and are increasingly used to connect multiple blockchain networks.

The report went on to examine whether these stablecoins could function within the established financial system, but came to the conclusion that the recent failure of algorithmic stablecoin ecosystems like Terra (LUNA), now known as Terra Classic (LUNC), indicates the potential impact that such stablecoins may have on the financial system due to a lack of regulatory oversight.An excerpt from the report read:

“The largest stablecoins serve a critical function for crypto-asset markets’ liquidity, this could have wide-ranging implications for crypto-asset markets if there is a run-on or failure of one of the largest stablecoins.”

When the cryptocurrency market crashed in May, it wasn’t just the algorithmic stablecoins that were in trouble; even the centralized stablecoin Tether (USDT) temporarily lost its peg and experienced outflows of about 10%.

Stablecoins were also rejected by the ECB as a viable payment option, citing that their speed, cost, and redemption terms and conditions have shown them to be “inadequate for use un real economy payments.”

To ensure that stablecoins don’t endanger the financial stability of European nations, the ECB suggested the implementation of the proper supervisory and regulatory measures. Though the survey did point out that there hasn’t been much stablecoin market activity in Europe as of now, there is still a small amount of stablecoin adoption in the region.

The Markets in Crypto-Assets (MiCa) framework, which provides direction for crypto asset service providers (CASPs) to operate within the Europe region, was recently authorized by the European Union. The interim agreement contains regulations that apply to stablecoin, trading platforms, and cryptocurrency wallets as well as issuers of unbacked digital assets.

To prevent a Terra-like catastrophe from costing investors billions of dollars, the ECB wants to limit stablecoin issuance to e-money and credit institutions.

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