European Central Bank once again warned of possible risks posed by the stablecoin Libra from Facebook

By Selena On May 9, 2020

The European Central Bank has once again warned of possible risks posed by the stablecoin Libra from Facebook. The ECB has presented three options for the possible development of the project. Libra may become a popular means of payment, a regulated store of value, or it will not be regulated at all. The ECB recognizes the latter as the most dangerous scenario.

Stablecoins are a solution for investors who may not want to put their money in volatile cryptocurrencies like Bitcoin.

ECB has been spooked by the gapping loopholes in their stablecoin regulations

The ECB highlighted significant gaps in its regulations. They claim that the industry needs to address legal concerns if they enjoy any benefits arising from stablecoins.

The increased adoption combined with Europe’s high appetite for crypto assets, ECB’s in-depth report, is a push to update their current framework for crypto-asset regulations to ensure there is pending any regulatory void.

However, the ECB was quick to note that due to the diverse nature of stablecoins, there was another regulatory crisis. The close features of stablecoins can eventually fit a variety of categories or none at all. Notably, stablecoins are backed by fiat currencies, while others are pegged on gemstones and cryptocurrency assets.

ECB reported:

“Depending on its design, the stablecoin’s asset management function may, however, also fall outside of the EU’s existing regulatory framework.”

The potential size of Libra with the broader financial system poses a risk to stability

The ECB points to Libra’s high ability to turn into a global stablecoin, citing the intensity of their backing. Accordingly, if Facebook accepts Libra, then it will have a vast user base of 2.4 billion, of which 10% of users are from Europe. The ECB then estimated that Libra’s reserves are likely to accumulate $ 3 trillion with 300 billion (10%) from users in Europe.

The report stated:

“[In] a scenario where Libra coins prove as popular as Facebook — the global size of the Libra Reserve could reach almost € 3tn [$ 3.2 trillion] of assets under management!”

A more modest projection of Libra’s popularity still finds a potential reserve of € 152.7 billion.

Libra compared to larger MMFs | Source: ECB

Breaking down of such an entity could lead to financial downturns on a global scale. The other concern was the reinvestment of the proceeds from coin sales instead of being held in a vault. The ECB was particularly worried as this would affect the coin’s value, depending on how the assets acquired are performing.

Saga Founder reached out for comment on the ECB article stating:

“Stablecoins, by name, suggest stability. But stablecoins, by their nature, are not so stable. Why? The value of these stablecoins is tethered to a single currency, and we have seen in recent months that single currency value can fluctuate wildly and with little warning, due to external factors.”

Facebook has been warned to have a new regulatory framework must be put in place to avoid a vacuum. Because if Libra suddenly needs to reduce a large number of assets, it could affect market liquidity. This has caused problems for the government and the bank that the Libra Reserve supports through its investments.

Libra can also create an imbalance in the European market. Although 10% of global assets are likely to be used by Europeans, Libra has said that 18% of the currency will be backed by the Euro.

The report from the ECB ends with a plea for developers to comply with applicable regulations, due to the risk of asset management malfunctions causing financial stability.

ECB concluded:

“Users are seeking more stable havens for the value of their assets – which is why there have been such significant inflows. Those seeking stability need to interrogate the mechanisms which stabilize their chosen coin – other they could be risking asset value if the currency their stablecoin holding is tethered to unexpectedly fluctuates.”

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