Italy’s central bank urges the establishment of a framework to avoid stablecoin runs.

Italy’s top banking authority is advocating for a strong and risk-based regulatory framework for stablecoins in order to prevent a worst-case scenario, such as a “run” on stablecoins.

In its recently released report titled “Markets, Infrastructures and Payment Systems” for June, the central bank urges regulators to apply the same financial conduct standards to stablecoin issuers in the industry.

#Bankitalia #26June Alessandra #Perrazzelli discussed about the evolving regulatory landscape for #DigitalAssets at @pointzeroforum Panel “State of Global Digital Asset Regulation: Navigating Opportunities in an Evolving Landscape” #PZF2023 #PointZeroForum @sif_sfi @elevandi

— Banca d’Italia (@bancaditalia) June 26, 2023

The bank states that the rise of cryptocurrencies, coupled with multiple “boom and bust cycles” in an largely unregulated environment, has caused significant harm to consumers.

The bank emphasizes that regulatory attention should be focused on stablecoin issuers due to their close connection to DeFi (Decentralized Finance). The bank states:

“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.”

The bank adds, “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.”

The Italian banking authority also highlights that stablecoins have not proven to be stable at all, citing the notable collapse of Terra’s algorithmic stablecoin TerraClassicUSD (USTC) in May 2022.

The adoption of #DLT solutions, especially if featured by weak organizational structures, could undermine the financial system due to lack of controls, lack of specific rules as mitigation tools, interdependence among regulated and non-regulated entities. The fragmentation is…

— Banca d’Italia (@bancaditalia) June 27, 2023

The bank argues that the industry needs to dispel “the decentralization illusion” by acknowledging that most decentralized protocols are operated by core stakeholders who can often benefit from ownership.

The bank states, “Such projects should be brought back to traditional, accountable business structures as a pre-condition for operating in the regulated financial sector.”

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However, the bank emphasizes that it is not necessary to subject every crypto asset or activity to financial services regulation. According to the bank:

“Not all crypto activities and not all forms of crypto-assets need to be covered or should be covered by financial sector regulation, in particular where their issuance, trading and holding do not serve customers’ financial needs through a payment or investment function.”

Blockchain enables various non-financial use cases such as decentralized identification, real estate, supply chain, voting, and carbon credits.

Italy’s central bank also calls for international cooperation and the establishment of an international regulatory framework, as the technology operates regardless of national borders.

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