European Central Bank publishes paper on stablecoins

According to Cointelegraph, the European Central Bank (ECB) has published a paper on stablecoins saying that stablecoins with a clear governance framework may be hampered by the uncertainty of the lack of regulation.

The ECB published the paper called “In search for stability in crypto-assets: are stablecoins the solution?” on 29th August. It describes the currencies’ digital units of value that are not a form of any specific currency but rather rely on a set of stabilization tools in order to minimize fluctuations in their price.
It also proposes a classification system for stablecoins based on different key concepts. Specifically, the ECB outlined four major types of stablecoins including those specified as tokenised funds, off-chain collateralised stablecoins, on-chain collateralised stablecoins and algorithmic stablecoins.

To date the ECB has identified at least 54 existing stablecoin projects, with 24 of them being operational. Its data shows that the total market capitalization of stablecoin initiatives almost tripled from €1.5 billion ($1.7 billion) in January 2018 to over €4.3 billion ($4.8 billion) in July 2019, while the average volume of stablecoin transactions was €13.5 billion per month within the period between January and July 2019.

Currently the most popular type of stablecoin is the tokenised fund type, which accounted for almost 97% of the monthly volume of all other stablecoin initiatives.
In its report, the ECB emphasized existing uncertainties in governance and regulatory treatment of stablecoin projects. It also stated that stablecoin adoption may require improvements to its governance, including the processes of updating the smart contracts at the core of the project.

However, those stablecoins with a clear governance framework are also at risk the ECB says, because they may “nevertheless be hampered by the uncertainty relating to the lack of regulatory scrutiny and recognition.” This is particularly relevant for financial institutions using the same tech to record traditional assets. The ECB concluded that this would make stablecoins redundant in the use of DLT outside crypto-asset markets.

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