Bank of Italy Calls for Framework to Prevent Stablecoin Runs30. June 2023
• Bank of Italy is calling for closer regulator scrutiny of stablecoins due to their potential to cause “significant consumer harm”.
• The bank warned that regulation should be synchronized with the growth of DeFi, as stablecoins are closely linked to decentralized finance.
• The central bank cited TerraClassicUSD (USTC) collapse in May 2022 as an example why a “robust, risk-based” regulatory framework for stablecoins is needed to prevent a run on issuers.
Bank of Italy Calls for Closer Regulatory Scrutiny of Stablecoins
The Bank of Italy has called for closer regulatory scrutiny of stablecoins due to their potential to cause “significant consumer harm”. This call comes from the bank’s recently released report titled “Markets, Infrastructures and Payment Systems” from June 2021.
Stablecoin Regulation Must Be Synchronized with DeFi Growth
The Italian banking authority noted that regulation should also be synchronized with the growth of DeFi, as stablecoins are closely linked to decentralized finance. The bank said: “A robust, risk-based regulation of stablecoins ensuring the prevention of ‘runs’ on their issuers is a necessary condition to reduce the fragility of the DeFi ecosystem, given the prominent role of this asset class in decentralized finance.”
TerraClassicUSD Collapse Cited as Example For Regulatory Framework
The central bank cited TerraClassicUSD (USTC) collapse in May 2022 as an example why a “robust, risk-based” regulatory framework for stablecoins is needed to prevent a run on issuers. The bank said: “It is crucial that policy interventions on stablecoins and DeFi are well synchronized since the diffusion of stablecoins […] is likely to spur new waves of DeFi innovation and increase the interconnection between traditional and decentralized finance.”
Decentralization Illusion Must Be Debunked
The Italian banking authority also noted that adoption of distributed ledger technology solutions could undermine the financial system due its lack or control or rules unless structured correctly. They urged regulators not to forget about debunking “the decentralization illusion” by acknowledging that most decentralized protocols are still centrally set up and administered by technical teams or large companies such as Facebook’s Libra project which has been approved by several countries so far.
In conclusion, Bank Of Italy has called for close regulatory scrutiny over stablecoin projects in order to protect consumers and prevent any runs on these assets’ issuers. It also emphasized that it was important not only synchronize regulations with growth in DFI but also debunk any false sense security created by decentralization illusions surrounding these projects by recognizing that they can still be administrated centrally if required.