Stablecoins May Threaten EU Market Integration And Interoperability – ECB
Out of three potential stablecoin scenarios, two could potentially lead to concerns for EU market integration and interoperability, as well as to risks to financial stability, therefore affecting safety and efficiency of the payment system, according to the European Central Bank (ECB).
In their recent report, the ECB Crypto Assets Task Force said that stablecoins may fall outside of the scope of the Single Euro Payments Area (SEPA) Regulation “that harmonises the way cashless euro payments are made across Europe and mandates interoperability.”
Stablecoin initiative such as Facebook‘s Libra, said the paper, could potentially lead to a pan-European coverage, but a pan-European reachability (having the ability to make payments at the national and EU level under the same conditions for all consumers) could necessitate “a deliberate effort.”
Additionally, should there be multiple stablecoin arrangements, the situation may lead to a fragmentation across the arrangements’ networks. “From a demand side perspective, users may face trade-offs between convenience on the one hand and additional costs (e.g. cash-out and other fees, idle balances) and switching barriers on the other hand,” the paper argued.
Within the paper, the Task Force aimed to assess stablecoins’ implications for the euro area based on three scenarios for the uptake of stablecoins, as they explained:
- as a cryptoassets accessory function that allows securing cryptoasset revenues in less volatile assets without leaving the crypto ecosystem;
- as a new payment method;
- as an alternative store of value.
The first scenario is described as “merely the continuation of the current state of the market,” which has so far posed no concerns for the financial sector and/or central bank tasks.
On the other hand, “stablecoins of the type envisaged in the second scenario may reach a scale [of operations such that fragilities within the stablecoin arrangement itself, and its links to the financial system, may give rise to financial stability risks – or in other words] such that financial stability risks can become material, and the safety and efficiency of the payment system may be affected.”
When it comes to the third scenario, “stablecoins collateralized by high-quality liquid assets (e.g. tokenized funds) might increase the demand for safe assets, thereby possibly affecting asset price formation, collateral valuation, money market functioning and monetary policy space.” The third scenario is the least plausible – since stablecoin arrangements through collateralization will not be exempted from a low rate environment – but also the most relevant from a monetary policy perspective, the paper said.
And even though “significant implications for monetary policy could arise” should this least plausible scenario materialize, euro deposits and cash are still “expected to be resilient to the possible advent of an ‘alternative store of value’,” said the Task Force.
However, both in the second and third scenarios, stablecoins “are likely to coexist with cash in payment transactions.” The reason behind this, the paper said, is that “the unique characteristics of cash” is “being physical,” while stablecoins – at least in a short/medium term – are expected to compete primarily with other electronic means of payment.
The Task Force stated that “even in a scenario where stablecoins satisfy the demand for storing value, they are likely to coexist with euro banknotes” – a statement they claimed stands true for the demand from outside the euro area as well, especially as euro banknotes are held by those who distrust their own country’s currency or banking system, but do trust the international currency in cash as its physical form. “It is hardly imaginable that in such situations people will store their last resort assets in a digital form,” they added.
The paper concluded that, under more plausible scenarios, the Eurosystem possesses a range of tools to manage the impact of stablecoins on its mandate and tasks, while it continues monitoring the stablecoins market development in order to be able to respond to rapid changes in all possible scenarios.
Meanwhile, in the US, as reported today, the Office of the Comptroller of the Currency (OCC) has clarified that US national banks and federal savings associations are now officially permitted to engage with fiat-backed stablecoins, while the Securities and Exchange Commission (SEC) stated that stablecoins are not necessarily securities.