ECB issues new warning about stablecoins and sees 'risks to financial stability'

Source: Exame Original Title: BCE issues new warning about stablecoins and sees 'risks to financial stability' Original Link: https://exame.com/future-of-money/bce-faz-novo-alerta-sobre-stablecoins-e-ve-riscos-a-estabilidade-financeira/ The European Central Bank released a new report this week stating that stablecoins, cryptocurrencies pegged to other assets, pose a risk not only to the crypto market but to the entire financial system around the world.

The monetary authority of the Eurozone has shared various warnings about these assets throughout the year, and reinforced its projections in November. For the ECB, the segment managed to “increase investor interest and achieve regulatory developments” that caused its value to surge.

However, stablecoins also “represent risks to global financial stability.” “The main vulnerability of stablecoins occurs when investors lose confidence that they can be converted into the asset to which they are pegged,” such as the dollar.

In these cases, “the loss of confidence can trigger a sell-off in a stablecoin and generate a parity loss event. Considering the importance of stablecoins in the crypto ecosystem, a major shock to a stablecoin can be fatal for the market.”

Furthermore, the ECB assesses that the loss of parity of a large stablecoin would affect not only the crypto world but also other segments of the financial market due to the increasing connection between the two worlds. The central bank specifically cites the significant potential risks involving USDT and USDC, the two largest stablecoins in the segment.

“A wave of selling of these stablecoins could trigger an accelerated sell-off of the assets backing their parity,” it highlights. In the case of USDT and USDC, the main reserve asset is U.S. Treasury securities, whose market could be affected by issues in the assets.

The ECB assesses that the impacts on the euro would be smaller, as the vast majority of stablecoins are pegged to the dollar. Still, the authority reinforced the defense of creating stricter rules for these cryptocurrencies.

The ECB's concerns have increased following the adoption of a favorable regulation and incentives for stablecoins. Since then, the central bank has issued warnings about the risks of these assets to the euro and markets around the world.