Key Takeaways
- The bank calls for a robust, risk-based regulatory framework to address the potential risks associated with stablecoins.
- The report highlights instances that have raised concerns about the stability of stablecoins, such as the de-pegging of Terra’s stablecoin and a notable run on Tether.
In a recent 40-page report titled “Markets, Infrastructures and Payment Systems,” the Central Bank of Italy has taken a firm stance on stablecoins, stating that they have not proved to be stable at all.
“Indeed, stablecoins – which are sometimes depicted as an efficient alternative in the market for cross-border payments – have not proved stable at all,” the paper noted; the report emphasizes the need for a strong, risk-based regulatory framework to address the potential risks associated with stablecoins and prevent a worst-case scenario—a “run” on stablecoins.
“A robust, risk-based regulation of stablecoins ensuring the prevention of ‘runs’ on their issuers is a necessary condition to reduce the fragility of the DeFi ecosystem, given the prominent role of this asset class in decentralized finance.”
The report highlights instances that have raised concerns about the stability of stablecoins, including the de-pegging of Terra’s stablecoin and a notable run on Tether.
The Central Bank of Italy’s report argues that the rise of cryptocurrencies, combined with the unregulated nature of the market and the occurrence of “boom and bust cycles,” has caused significant harm to consumers.
The bank further emphasizes the importance of synchronizing policy interventions on stablecoins and DeFi, as the diffusion of stablecoins is likely to stimulate new waves of DeFi innovation and increase the interconnection between traditional and decentralized finance.
Additionally, the Italian banking authority draws attention to the instability of stablecoins by referencing the collapse of Terra’s algorithmic stablecoin, TerraClassicUSD (USTC), in May 2022.
It also calls for reevaluating the notion of decentralization, arguing that many decentralized protocols are operated by core stakeholders who can extract ownership benefits. As a result, the bank suggests bringing such projects back under traditional, accountable business structures as a precondition for operating within the regulated financial sector.
However, the Central Bank of Italy clarifies that not all crypto assets or activities need to be subject to financial services regulation. The latest development comes amid the bank launching a pilot called Project Leonidas, involving 18 Italian commercial banks and the Associazione Bancaria Italiana (ABI) to assess the viability of a central bank digital currency (CBDC).
