In a joint statement on 5 December 2019, the European Commission and the Council of the EU have set out the EU’s position on the use of global stablecoins. As expected, whilst they accept that financial innovations can benefit the financial sector, stablecoins pose many global risks, including, but not limited to, risks to consumers and cybersecurity. Therefore, global stablecoins are not to start operating within the EU until the legal, regulatory and oversight challenges have been addressed at an EU level.
What is a Stablecoin?
A stablecoin is a type of cryptocurrency that offers greater price stability because they tend to be backed by either; (1) fiat funds, such as the US dollar (an example being PAX), (2) a basket of cryptoassets (for example, DAI, which is backed by the creation of collateralised debt positions), and/or (3) certain algorithms. These mitigate the volatility associated with other forms of cryptocurrency, such as bitcoin.
The Risks posed by Stablecoins
According to the Commission and the Council, stablecoins present multifaceted risks to consumer protection, privacy, taxation, cyber security, operational resilience, money laundering, terrorism financing, market integrity, governance and legal certainty. Quite a long list! They consider that global stablecoins are likely to see these risks amplified, which could present further risks to monetary sovereignty, monetary policies, financial stability, fair competition and the safety and efficiency of payment systems.
Global stablecoins can also suffer from lack of transparency and oversight. The Commission and the Council are particularly keen to see legal clarity over their status, as some projects have failed to provide sufficient information on how they will manage the above risks, which has made it difficult for the authorities to conclude if the present EU regulatory framework applies. Entities intending to issue stablecoins, or carry out activities involving stablecoins, should provide full and adequate information to enable EU authorities to carry out proper assessments against the existing rules.
More positively, the statement recognises that technological innovations can produce economic benefits for the financial sector and can promote competition and financial inclusion. The two EU institutions also recognise the potential advantages that stablecoins can offer, as they allow consumers and companies to transfer money across borders in a faster and cheaper method. The EU Finance Commissioner, Valdis Dombrovskis, stated at the ECOFIN press conference that, provided the risks are properly addressed, innovation around stablecoins can play a positive role for investors, consumers and the efficiency of the financial system.
The Commission and Council wish to tackle the challenges raised by stablecoins through a common and coordinated approach at EU level. In their view, the risks they pose should be subject to clear and proportionate evidence-based regulatory and oversight frameworks. Consistent with this objective, the statement emphasises that “the Council and the Commission are willing to act swiftly, in cooperation with the ECB and with national and European Supervisory Authorities”.
While supportive of regulation that will allow stablecoins to offer their full benefit (see above), the “Council and the Commission are prepared to take all necessary measures to ensure appropriate standards of consumer protection and orderly monetary and financial conditions”. The effect is to prioritise putting in place effective regulation over permitting their development.
Some EU states, such as France, Germany and Malta, already have national crypto-asset laws in place, but as these currencies go beyond borders, national regulations do not offer the oversight and certainty that the Commission and Council require. Dombrovskis informed finance ministers that the Commission is preparing a regulation to govern crypto-assets, including stablecoins, as part of a global coordinated response. Additionally, David Lewis, Executive Secretary of the Financial Action Task Force, has stated that the taskforce is working on the implications of stablecoins and will update the G20 finance ministers and central bank governors on its policy recommendations and the risks and opportunities from this innovation.
Having ruled out, for the time being, stablecoin initiatives, the Council and the Commission welcome the fact that EU central banks and regulators are looking at the costs and benefits of central bank digital currencies. They also flag up the key role of European “payment actors” in taking advantage of the ongoing digital transformation of the payment system to meet customer and market expectations.