The Bank of Italy (Banca d’Italia) called for thorough stablecoin regulation in a report published on June 28.
Bank questions the reliability of stablecoins
The central bank described cryptocurrency regulation in general, but emphasized the need to regulate stablecoins, which it said have “turned out not stable at all.”
The bank said algorithmic stablecoins have “inherent vulnerability” and added that other stablecoins suffer from price volatility and have speculative use.
The Bank of Italy cited the collapse of the algorithmic stablecoin TerraUSD (USTC) and a lower price peg related to the collateralized stablecoin Tether (USDT) as issues. It said regulators “cannot fail to take action” in light of these events.
The bank also suggested that the proliferation of stablecoins could foster innovation in decentralized finance (DeFi) and create connections to traditional finance. As such, it said stablecoin and DeFi regulations should be “well-synced”.
It suggested that stablecoin issuers would benefit from regulations enforcing liquidity risk management. It cited the EU-wide Markets in Crypto-assets (MiCA) framework, aimed at ensuring consumer protection and market stability, as an example of this. Elsewhere, the central bank said the EU Framework for Payment Instruments, Schemes and Arrangements (PISA) could also be extended to stablecoins.
The bank also cited a joint committee framework of the Bank for International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO), known as CPMI-IOSCO, as a “milestone initiative”. That framework applies to stablecoins pegged to a single currency; it deals with redemption and issuance, storage and exchange, transfers and governance.
Not all crypto activities need regulation
The Bank of Italy said in the conclusion of its report that not all cryptocurrencies and activities need to be subject to financial regulation.
Throughout the report, the central bank distinguished collateralized (or fiat-backed stablecoins) from other cryptoassets. It also noted that in some cases crypto fraud can be combated through criminal prosecution rather than specific regulation.
The bank nevertheless cited other market participants, including intermediary services and DeFi providers, as potentially in need of regulation.
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