Italy’s top banking authority recently released a report calling for a “robust, risk-based” regulatory framework for stablecoins. The report highlights the need for regulation to prevent a worst-case scenario, such as a “run” on stablecoins. The rise of cryptocurrencies, coupled with unregulated environments and boom and bust cycles, has caused significant harm to consumers.
The report emphasizes the importance of applying the same financial conduct standards to stablecoin issuers in the industry. It calls for a synchronized approach to policy interventions on stablecoins and decentralized finance (DeFi). The bank believes that stablecoins play a prominent role in decentralized finance and that regulating stablecoins can reduce the fragility of the entire DeFi ecosystem.
The Italian banking authority also points out that stablecoins have not proved to be stable at all. It cites the collapse of Terra’s algorithmic stablecoin, TerraClassicUSD (USTC), in May 2022. This highlights the need for regulatory oversight to ensure stability and protect consumers.
The report also addresses the issue of the “decentralization illusion” in the crypto industry. It states that most decentralized protocols are operated by core stakeholders who can extract ownership benefits. The banking authority suggests bringing these projects back to traditional, accountable business structures as a pre-condition for operating in the regulated financial sector.
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However, the report acknowledges that not all crypto assets or activities need to be subjected to financial services regulation. It states that regulation should only apply where issuance, trading, and holding of crypto assets serve customers’ financial needs through payment or investment functions. This recognizes the non-financial use cases enabled by blockchain technology, such as decentralized identification, real estate, supply chain management, voting systems, and carbon credits.
Italy’s central bank also emphasizes the need for international cooperation in establishing a regulatory framework for cryptocurrencies. The technology operates irrespective of national borders, and a coordinated approach among countries is necessary to effectively regulate the crypto industry.
In conclusion, the report from Italy’s top banking authority highlights the need for a robust regulatory framework for stablecoins. It emphasizes the importance of preventing “runs” on stablecoin issuers and reducing the fragility of the DeFi ecosystem. While recognizing the potential of blockchain technology for non-financial use cases, the report calls for regulation in areas where cryptocurrencies serve customers’ financial needs. International cooperation is also stressed to effectively regulate the crypto industry across borders. By implementing these recommendations, Italy aims to protect consumers and ensure the stability and integrity of the financial system in the face of evolving trends in digital assets.
