Italy’s central bank has urged the implementation of a robust regulatory framework for stablecoins to prevent potential runs on these digital assets. In its June 2023 report on Markets, Infrastructures, and Payment Systems, the Bank of Italy emphasized the need for closer scrutiny and regulation of stablecoin issuers in light of the significant consumer harm caused by unregulated cryptocurrencies and their volatile market cycles.
The bank highlighted the close connection between stablecoins and decentralized finance (DeFi) and stressed that a risk-based regulation of stablecoins is crucial to reduce the fragility of the DeFi ecosystem. The prevention of runs on stablecoin issuers is seen as essential to maintain stability within this asset class, which plays a prominent role in decentralized finance. The bank emphasized the importance of synchronized policy interventions for stablecoins and DeFi to manage their interconnection and spur innovation.
Citing past instances of instability, such as the notable collapse of TerraClassicUSD (USTC), the bank expressed concerns about stablecoins’ lack of stability. It called for stablecoin projects to be brought under traditional, accountable business structures to operate within the regulated financial sector. This move aims to debunk the illusion of decentralization, acknowledging that many decentralized protocols are controlled by core stakeholders who can benefit disproportionately from the system.
While advocating for effective regulations, the bank also acknowledged that not all crypto activities or assets need to fall under financial services regulation. It emphasized that non-financial use cases enabled by blockchain technology, including decentralized identification, real estate, supply chain management, voting systems, and carbon credits, may not require the same level of regulation.
Furthermore, the Bank of Italy highlighted the necessity for international cooperation in establishing an international regulatory framework. Given the borderless nature of blockchain technology, countries should work together to ensure coherent regulations that address the challenges posed by cryptocurrencies and blockchain-based systems.
Conclusion
Italy’s central bank’s call for a robust regulatory framework for stablecoins reflects its commitment to protect consumers and maintain financial stability in the cryptocurrency industry. By addressing stablecoin runs, synchronizing policies with DeFi, and emphasizing international cooperation, the bank aims to create a safer and more reliable environment for the evolving landscape of digital assets.