The European Central Bank (ECB) has warned about the exuberant behavior exhibited in different markets, including that involving cryptocurrency. The central bank is encouraging regulators to act on regulating stablecoins, also known as fiat-backed cryptocurrencies. According to the bank, the stablecoin market is growing rapidly and requires an immediate regulatory framework for it.
The bank is worried about the effect of stablecoins on the traditional financial market, given that they are prone to volatility like Bitcoin. It said that investors could record significant losses if they continue to leverage the growing market.
ECB President Says Stablecoins Are Assets and Needed to be Backed
In September, ECB President Christian Lagarde, suggested that stablecoins shouldn’t be treated as currencies but as assets, reiterating the need for such coins to be backed by the corresponding fiat currency. While discussing the launch of the region’s CBDC Digital Euro, Lagarde stated that although stablecoins have the same attributes of a coin, it isn’t actually a coin. It is completely different from and associated with fiat currencies. Their values will be pegged to the US dollar.
The bank discloses that global monetary easing has encouraged risky investment practices, despite the region witnessing a 4.1 inflation rate in October. The bank predicts that markets could see correction, pointing to the weak economic recovery, sudden adjustments in market expectations about monetary policy, and emphasis on the non-financial corporate sector as possible triggers. The market cap. of stablecoins are now put at $120B.
Plans to Launch Digital Euro Still Underway
In March, the ECB president disclosed that the European region may release its digital Euro in the next four years, provided that policymakers agree to the decision. According to Lagarde, discussions alongside preparations may take up to four years or a little longer than expected.
Earlier this September at the World Economic Forum, the bank revealed that it will open a two-year investigation into its proposed plan to release the digital Euro. The investigation will focus on the processes involved in distribution, the economic effect of the CBDC on the European market, and the laws that need to be put in place to facilitate utilization.
According to Lagarde, the reason for the investigation is to ensure that the region’s CBDC addresses the concerns of its citizens without hampering the traditional financial structure. At the summit, Lagarde said that the digital Euro must address the people’s demands, thus stressing the need for the bank to be more prepared to release the technology to the region.
With different countries of the world experimenting with CBDCs, it’s apparent that many countries will launch their digitized fiat currencies soon. Some countries like Nigeria and China, have already launched the eNaira and eYuan to facilitate cross-border payments and help the unbanked conduct transactions easily. India, Brazil, and Jamaica are also exploring the use cases of the CBDC and how to integrate it into their financial infrastructures.