Those who issue stablecoins must meet liquidity requirements on cash reserves. Facebook should adhere to these regulations before launching its stablecoin in the eurozone.
The European Central Bank (ECB) seeks the power of veto and a wider range of supervision over the launch of cryptocurrencies. This would include proposals like Facebook’s stablecoin DIEM, previously known as Libra.
Stablecoin issuers should meet “rigorous liquidity requirements” on cash reserves, similarly to money market funds, says the ECB.
In recent days, the European Central Bank introduced a bill and a modification of a regulation on the cryptocurrency markets. This stems from a bill that they submitted on September 24th, 2020. The Council of the European Union and the European Parliament had previously made a series of requests.
According to the current document, called “Opinion of the European Central Bank”, it is necessary to evaluate the risk in the conditions of stablecoins. Since these pose a potential threat to the financial stability of the eurozone, they should “fall under the exclusive competence of the ECB”.
The text notes that major stablecoin issuers must regularly apply stress tests. They should consider scenarios of financial stress, such as interest rate shocks, and non-financial, such as operational risk.
One section deals with specific observations on financial stability and prudential aspects of supervision. They argue that an institution should notify the ECB when it issues a white paper intending to provide cryptocurrency-related services.
The ECB should have the last word on the possibility of enabling the launch of a stablecoin in the euro zone. This should not jeopardize their control over inflation or payment security.
The Boom of Bitcoin and Other Cryptocurrencies Worries Banks
The rise of cryptocurrencies, especially stablecoins, whose value derives from one or more fiat currencies worries the world’s central banks. They fear that this could negatively affect the control of payments, banking, and ultimately, money supply.
On September 24th, 2020, the European Commission proposed a comprehensive regulatory framework for cryptocurrencies. That document would make them a financial instrument that the ECB should regulate.
The bill “Regulation of the market in crypto assets” (MiCA) would provide this economic block with clarity on what a crypto asset constitutes. It would also provide rules on cryptocurrency custody and capital requirements, as well as the relationship between the issuer of tokens and their holder.
According to the ECB, Facebook should adhere to this regulation before launching its stablecoin proposal in the eurozone. The company intended to launch its cryptocurrency, initially called Libra, with the support of a basket of fiat currencies. However, they scaled down the project in 2020 after receiving advice on regulatory matters.
The ECB drew their attention to companies selling tokens pegged to various fiat currencies. He told them that they “should give end-users at least one direct claim on the issuer, reserve assets, and exchange rights.”
ECB President Christine Lagarde said that it is necessary to regulate Bitcoin globally so that it does not become a safety valve. Lagarde recently considered that “international cooperation and multilateral action are necessary” to promote strong regulation on Bitcoin.
By Alexander Salazar