ECB | Jul 25, 2022
Stablecoins’ role in crypto and beyond: functions, risks and policy
Stablecoins are in the spotlight due to their rapid growth, increasing global use cases and potential financial risk contagion channels. This article analyses the role played by stablecoins within the wider crypto-asset ecosystem and finds that some existing stablecoins are already critical to liquidity in crypto-asset markets. This could have wide-ranging implications for crypto-asset markets if a large stablecoin were to fail and could also have contagion effects if crypto-assets’ interlinkages with the traditional financial system continue rising.
See: UK Proposes Regulations That Would Recognize Stablecoins As A Form Of Payment
To date, the speed and cost of stablecoin transactions, as well as their redemption terms and conditions, have fallen short of what is required of practical means of payment in the real economy. Their growth, innovation and increasing use cases, coupled with their potential contagion channels to the financial sector, call for the urgent implementation of effective regulatory, supervisory and oversight frameworks before significant further interconnectedness with the traditional financial system occurs.
Is climate risk priced into crypto-assets?
Some crypto-assets have a significant carbon footprint and are estimated to consume a similar amount of energy each year to individual countries like Spain, the Netherlands or Austria. As the mining and expansion of these crypto-assets are fully dependent on energy supply, their valuation is particularly vulnerable to jurisdictions’ climate policies. Increasing financial exposures to such crypto-assets are therefore likely to contribute to increased transition risk for the financial system.
See: A Carbon-Negative Blockchain Making Money Beautiful
This [full] article provides an overview of the estimated carbon footprint of certain crypto-assets such as bitcoin and its causes. It also discusses the primary policy role of public authorities, which need to evaluate whether the outsized carbon footprint of certain crypto-assets undermines their green transition commitments. Finally, it analyses policy options for prudential standard-setters and the need for climate-related considerations in crypto-investors’ practices.
Decentralised finance – a new unregulated non-bank system?
Risks and Regulation of DeFi
- DeFi is subject to some of the same vulnerabilities known from traditional finance, which can be amplified by the specific features of DeFi.
- New risks inherent to DeFi, such as operational risks stemming from the underlying technology and governance risks, have risen with the expansion of DeFi.
- The lack of traditional centralised entry points for regulation and its opaque and anonymous nature pose challenges for policymakers in terms of enforcement and effective regulation and supervision.
See: A European approach to DeFi regulation
- Where regulatory gaps exist, the innovative ways in which DeFi provides financial services will require innovative ways of regulation to close regulatory loopholes. DeFi may also require the introduction of technology-based regulatory systems, so-called embedded regulation, where regulatory requirements are embedded technically into DeFi
- As vulnerabilities start to build, an internationally coordinated approach is needed to mitigate DeFi risks before they pose a risk to financial stability.
Continue to the full article –> here
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