Bank of Italy Flags Risks in Globally Issued Stablecoins

Bank of Italy warns that globally issued stablecoins pose financial risks, urging stricter rules, redemption guarantees, and international cooperation for stability.

The Bank of Italy has raised concerns over the growing use of globally issued stablecoins. On Thursday, Chiara Scotti, who acts as the Vice Director of the central bank, cautioned that the issuance of stablecoins by various players in various nations may pose significant threats to the financial system in the European Union.

Multi-Issuer Stablecoins Could Mislead Holders

These remarks were made by Scottti in the Economics of Payments Conference in Rome. She emphasized that, even though such stablecoins can increase liquidity in the world, they are associated with massive risks.

She says that this is even worse when any of the issuers is not located in the EU. At that, the legal, operational, and financial risks of instability augment. This is largely because the rules of consumer guard in not all jurisdictions are the same.

She stated that a stablecoin brand can be issued by multiple issuers in various countries in a multi-issuance model. Although this might make the system more flexible and scalable, it may also lead to confusion and mismanagement of the reserves that can be taken.

As an illustration, all the tokens may be viewed by the token holders as identical, even though they may have different places of issue. This may, however, cause a discrepancy between the commitments of the holders and reserves to support those tokens.

Related Reading: UK and U.S. Strengthen Ties on Stablecoins and Blockchain

One step was already undertaken by the European Union to deal with such risks. In 2023, it implemented a universal framework of digital assets named Markets in Crypto-Assets Regulation (MiCAR). This framework establishes consumer protection, transparency, and financial stability rules in the EU.

But, as Scotti noted, this is not necessarily the same situation with third-country issuers, or those not in the EU. This puts a loophole in regulation, and this may be perilous in case the issuer does not fulfill its duties.

Cross-Border Crisis Measures Needed for Stablecoin Stability

Scotti also alleged that the issuers based in the EU would be compelled to redeem tokens, which are possessed by users in different nations. Failure by the issuer to transfer the assets in time outside the EU may result in a shortage in reserves. Consequently, the EU organization may feel the pressure, despite the fact that it may be acting within the lines.

To avoid this, Scotti encouraged the regulators to restrict the issuance of the stablecoins to jurisdictions with similar standards. She also demanded guarantees of redemption such that the holders of the stablecoins should never be at a loss of redeeming the tokens into real money.

Also, she focused on the necessity of cross-border crisis measures. These are international agreements that may assist in controlling the financial crises in the event of several issuers.

Her comments are made as the projects of global stablecoins are still growing. Multiple technology and cryptocurrency companies are considering multi-country issuance designs to see more adoption. But regulators such as the Bank of Italy are protesting, pointing to the threat to financial stability.

To sum up, although stablecoins could be advantageous in terms of quicker payment and better liquidity, they have to be handled with caution. Scotti says that the main secrets of keeping the system safe are strict rules, uniformity of standards, and effective collaboration between nations.