EU warns of bank risks from stablecoins

EU warns of bank risks from stablecoins


The European Systemic Risk Board recommends increased disclosures and monitoring to combat cryptocurrency market risks, as highlighted in their comprehensive report on crypto assets and decentralized finance.

The European Systemic Danger Board has recommended increased disclosures and monitoring as measures to combat the  dangers associated with the digital currency market.

This alarm comes after concerns have been raised about the  capacity impact of a sudden crisis in the cryptocurrency sector on the worldwide economy.

Findings span 77 pages

The European Systemic Danger Board (ESRB), an oversight body operating under the European Monetary Authority, released a comprehensive report on May 25, delving into the realm of cryptocurrency assets and decentralized finance (DeFi).

Spanning 77 pages, the report emphasizes the rapid growth of the volatile cryptocurrency industry and its deepening integration with the traditional financial market. 

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Even though the shocks experienced by the cryptocurrency sector in 2022 did not cause whole lot of harm to traditional finance (TradFi), the report argues that the existing danger monitoring system is inadequate in detecting potential concerning trends that may emerge in the future.

The report likewise outlines the financial stability danger posed by reserve-backed crypto stablecoins, which have connections to the traditional financial system owing to their underlying assets in conventional fixed income instruments.

In contrast to  regulated money market funds, these crypto stablecoins lack regulatory oversight, a clear judicial system, and access to a lender of last resort. Transparency in their accounting practices likewise varies, raising concerns about the quality of reserves backing the tokens. 

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The ESRB goes on to state that previous shocks in the cryptocurrency market demonstrated a preference for more safe crypto stablecoin issuers, mentioning Tether’s (USDT) fluctuating market as an example.

To lower the likelihood of a run, the report points to the United States President’s Working Group on Financial Markets report which proposed limiting the issuance of reserve-backed crypto stablecoins to chartered banks could transform them into traditional demand deposit liabilities.

This would subject the issuers to banking regulation, supervision, and deposit insurance, aligning them with the present banking system and reducing the possibility of panic-induced runs.

By implementing these measures, the aim would effectively be to strengthen stability and instill greater confidence in the functioning of reserve-backed stablecoins.

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Enhanced monitoring

Speaking about the systemic significance of crypto- investment markets, the recently published report emphasizes the critical necessity for enhanced monitoring and evaluation of market developments.

Recognizing the evolving nature of these markets, the report underscores the importance of closely scrutinizing and assessing their dynamics to secure appropriate regulatory measures and safeguard financial stability.

This release comes just one 30 days after the approval of MiCa, the 1st regulatory framework of its kind across the globe.

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