ECB President: Stablecoin is not stable, it will be regulated as a payment system

Last week, in a letter to members of the European Parliament, European Central Bank President Christine Lagarde talked about stablecoins and Libra.

Lagarde believes that Facebook's social media attributes make it a strong competitive advantage in stablecoin development, and the combination of social media data and financial data will cause other operators to lose competitiveness.

She also mentioned that it is incorrect to call stablecoins because they are different from traditional financial systems in that they still cannot guarantee the value and security of assets.

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On the regulatory front, she noted that the European Central Bank is planning to apply its payment system regulatory framework to stablecoins.

Before becoming president of the European Central Bank, Lagarde was the chairman of the International Monetary Fund (IMF) and had a certain understanding of blockchain and digital currencies. She had called on the central bank to consider issuing digital currencies and suggested that regulators use blockchain technology to arrest criminals.

The following is the content of the letter issued by Lagarde:

Dear member of the European Parliament,

Thank you for the letter you transmitted through Irene Tinagli, Chairman of the Economic and Monetary Affairs Committee (ECON).

As I emphasized during the hearing of the Economic Commission of the European Parliament on December 2, 2019, the European Central Bank is paying close attention to innovation in the fields of finance and payments, and assessing the advantages and risks of innovative projects, including the Libra plan.

The goal of stablecoin programs such as Libra is to address the deficiencies in cross-border payments by establishing a new and independent payment ecosystem that does not rely on existing clearing and settlement processes. Through this system, their goal is to provide lower cost, more efficient payment solutions and promote inclusive finance. At the same time, as I pointed out in my statement to the Economic Commission, innovation (including stablecoins) will only be beneficial if relevant risks are mitigated through effective regulation and oversight.

One of the possible risks is that the stablecoin may cause the market to be highly concentrated. If the entity that manages stablecoins controls a large digital platform, they can prevent other service providers or payment methods from entering their platform by promoting the application of their own solutions (there may be a lock-in effect), thereby affecting the level playing field. In addition, the potential combination of social media data and financial data may bring strong competitive advantages to stablecoin operators and weaken market competitiveness. The European System of Central bank has been monitoring this in a broader context, with large tech companies entering the European retail payment market.

If the stable asset plan reaches a certain scale, if retail users use stable assets as an alternative to bank deposits, then a considerable amount of retail funds may be transferred from the banking system to non-bank entities. Although the stablecoin promises to be “stable” and it is possible to exchange the stablecoin held for fiat currency at any time, the value of the stablecoin will mainly depend on its governance and risk management and the value of the relevant assets or fund portfolio. Just promising to sell the stablecoin to invest in low-risk financial instruments will not be enough to ensure its stability.

In this regard, the term "stable currency" is misused. For stablecoin users, they should be aware that financial losses are likely to occur, and traditional financial stability networks (including the deposit guarantee scheme and the role of the central bank as the lender of last resort) will not bear these losses.

If successful, Libra's complex token issuance, reserve asset management, and payment system operation functions may form a large-scale, self-sufficient financial ecosystem. It is essential that the same rules apply to all activities that generate the same risk, regardless of the technology used or the identity of the service provider. In other words, "the same business, the same risk, the same rules" should be the guiding principle of stable currency supervision and put it at the core of technology-neutral supervision.

Globally, it is widely believed that stablecoins, including Libra, should not begin to operate before their public policy and regulatory risks are assessed and properly addressed. The European Central Bank agrees with the joint statement issued by the European Council and the European Commission that it is necessary to legally clarify the status of stablecoins and subject them to a clear and appropriate regulatory and supervisory framework. The European Union and the world are working to assess the risks of the Libra project, review the applicability of existing rules, and identify loopholes in the current regulatory and oversight framework. Given Libra's cross-border nature, international coordination is essential to ensure regulatory consistency and prevent regulatory arbitrage.

The European Central Bank intends to apply its payment system regulatory framework to stablecoins. The European Central Bank is also reviewing its existing regulatory framework for payment instruments, plans and deployments to determine which stablecoins for value transfer between end users fall under the jurisdiction of the euro system. Finally, the European Central Bank will work with other international agencies to ensure that the requirements of the euro system still apply by eliminating any gaps that innovative solutions may create. We also support the establishment of cooperative oversight frameworks when payments involve multiple jurisdictions.

Christine Lagarde

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