The Bank of Italy has recently released the “Market Infrastructure and Payment System” report for June. The Italian central bank has urged the financial watchdogs to formulate a “robust risk-based” regulatory framework for stablecoins backed by Italian Lira.
The bank requested the regulators to apply the existing financial conduct measure to the local stablecoin issuers to prevent the stablecoin run. Citing the bank report a stablecoin run will disrupt the financial stability of the country.
Impact of Stablecoin Runs
Per the bank report, the regulators noted that the uncertainty in the crypto sector had exposed consumers to risks. They observed that despite the growth of the crypto sector, the industry had experienced multiple “booms and bust cycles,” which has been a threat to the consumer.
The bank underscored the need to implement regulatory measures to safeguard consumers and create a friendly financial sector.
From the bank report, the regulators observed a close relationship between stablecoin and decentralized finance (DeFi) platforms. Following this, the bank requested the regulators to implement robust risk-based regulation on stablecoin to prevent the occurrence of stablecoin runs.
The apex bank explained further that taking immediate regulation action will minimize the fragility of the DeFi platform. Remarkably stablecoins have played a crucial role in the growth of the DeFi sector.
In light of the bank report, the financial institution explained the need for policy intervention between stablecoins and decentralized finance. The bank anticipates that the growth of the stablecoin will accelerate innovation in the DeFi ecosystem.
In addition, the bank highlighted that the remarkable growth of stablecoins would strengthen the links between conventional finance and DeFi.
Why are Stablecoins Unstable?
In the June report, the apex bank noted that following the fallout of TerraClassic USD (USTC), a stablecoin cannot be considered a stable digital asset. The bank also urged the crypto industry to accept that most decentralized protocols administered by core stakeholders can “extract ownership benefits” regularly. This decentralized platform should be classified under traditional finance, requiring entrepreneurs or companies to be more accountable when operating in a regulated financial sector.
The Italian bank authority emphasized that every crypto asset service or product didn’t require to be supervised by the financial service regulation. Typically, the bank noted that the financial regulators did not regulate some crypto assets.
The bank observed that other regulators regulate firms that provide payment and investment services. Also, nonfinancial services, including blockchain, real estate, supply chain, and credit carbon, do not require extensive regulatory oversight.
Furthermore, the Italian bank urged regulators from other countries to join efforts in developing an international regulatory framework to cope with technological changes.