Brussels – Beware of “stablecoins.” Despite their name, they are anything but stable and pose a serious risk of liquidity problems, thereby jeopardizing financial solidity. Launching the alarm is Christine Lagarde, President of the European Central Bank, who is increasingly concerned about the unregulated spread of virtual currencies and their potential for new crises.
“At first sight, these entities and activities may seem novel. But we do not need to wait for them to mature to realise that they are reintroducing old risks through the back door,” Lagarde warns, speaking at the annual conference of the European Systemic Risk Board, the eurozone’s financial system supervisory body. Among these, she explains, “the most evident is liquidity risk.”
For Lagarde, a race to risk with disastrous consequences is looming. Indeed, as she recalls, in economics and even more so in finance, “We know the challenges posed by institutions that invest in risky assets while promising investors redemption at short notice and at par.” Such entities must mitigate the risk of a run by “ensuring that they have sufficient liquidity to meet redemptions swiftly.”
The EU has already tried to run for cover and hedge against risks. In the case of stablecoins, the crypto assets market regulation aims to address the risks posed by new currencies in two ways. First, stablecoin issuers must always allow EU investors to redeem their holdings at par value. Second, stablecoin issuers must hold a substantial share of reserves in bank deposits. “But gaps remain,” the ECB president acknowledges.
Hence, the call for the European Commission and Member States to “take concrete steps now”, before it is too late. When it comes to stablecoins, Lagarde suggests, “European legislation should ensure that such schemes cannot operate in the EU unless supported by robust equivalence regimes in other jurisdictions and safeguards relating to the transfer of assets between the EU and non-EU entities.“ International cooperation, a global agreement regulating the use of new currencies, is also “indispensable. Without a level playing field globally, risks will always seek the path of least resistance,” she warned.
English version by the Translation Service of Withub
