Europe’s central bank is worried about possible launch on stablecoins

The European Central Bank has informed international community about the risks of so-called “stablecoin launching.”

Similar to the term “bank runs” in the traditional financial system, stablecoin runs could occur if end users do not trust in the issuer or its network,

In traditional finance, a bank run takes place when a large number of clients simultaneously take away their in case if they have doubts about bank solvency. The more people withdraw their funds, the greater the default probability is.

The ECB mentions that some parts of the stablecoin arrangement may stop functioning in a manner reminding the one of the 2007 global financial crisis when the redemption of securitization vehicles has been annuled.

The bank said that there is a range of events that could cause a run on a stablecoin. The main elements are the following: cyberattacks to the system or theft from wallets, as well as customer doubts on the value of the stablecoin.

“Such a realization could trigger substantial redemptions of stablecoins which could be amplified to the extent that end users misconceive stablecoin holdings as a substitute of bank deposits,” mentioned the ECB officials.

Stablecoin runs might take place when the stablecoin arrangement supposes a fixed value of the stablecoin like some tokenized funds. In this case, the stablecoin issuer will be responsible for covering all losses arising out of investment such as the losses from exchange rate fluctuations.

In these scenarios, the massive liquidation of assets could cause negative contagion effects on the international financial system.

As the stablecoin market has been grown significantly in 2020, a hypothetical run on a stablecoin could make a significant stress for the global crypto community. Tether (USDT) — the largest stablecoin by market cap with the daily trading volume accounting to more than 42 billion  USD.

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