Italy’s leading banking authority has emphasized the need for a strong and risk-based regulatory framework surrounding stablecoins, aiming to avert a potential worst-case scenario of a destabilizing “run” on these digital assets.
The central bank’s latest report, titled “Markets, Infrastructures and Payment Systems” for June, specifically urges regulators to enforce comparable financial conduct standards on stablecoin issuers within the industry.
Significant harm in the sector
In light of the rise of cryptocurrencies and the inherent volatility witnessed in multiple unregulated cycles, the bank highlighted the significant harm inflicted upon consumers in this sector. The bank emphasized the need for regulatory attention, particularly towards stablecoin issuers, due to their close ties with decentralized finance (DeFi).
It stressed the importance of a robust and risk-based regulatory framework for stablecoins to prevent issuer “runs” and reduce the fragility of the DeFi ecosystem, given the influential role of stablecoins within decentralized finance.
The bank also emphasized the necessity for synchronized policy interventions on stablecoins and DeFi, as the widespread adoption of stablecoins is likely to fuel new waves of DeFi innovation and deepen the interconnection between traditional and decentralized financial systems.
The bank’s stance aims to prompt lawmakers to address the regulatory challenges posed by assets that do not fit into existing classification frameworks, including collateralized stablecoins, native tokens of programmable blockchains, utility tokens, and protocols’ governance tokens.
In addition, the bank stressed the need for international cooperation, highlighting that the borderless nature of cryptocurrencies necessitates flexible and scalable arrangements between countries.
Although specific examples of these arrangements were not provided, the bank emphasized the importance of developing collaborative solutions to effectively regulate the crypto sphere, given its distinct characteristics compared to traditional financial systems.
Non-financial use cases
By differentiating between crypto assets that serve customers’ financial needs and those that have non-financial use cases, the bank acknowledges the diverse applications of blockchain technology beyond traditional finance.
The recognition of non-financial use cases enabled by blockchain, such as decentralized identification, real estate, supply chain management, voting, and carbon credits, highlights the potential for innovation and disruption across various industries.
These use cases operate independently of strict financial regulation, allowing for flexibility and tailored approaches that align with the specific nature and requirements of each application.
By acknowledging that certain blockchain-enabled use cases can function effectively without extensive financial oversight, the Bank of Italy demonstrates an understanding of the unique characteristics and capabilities of distributed ledger technology.
This approach fosters an environment conducive to exploration and development of novel solutions, while is becoming more and more necessary as areas such as Hong Kong are following a similar approach.