Stablecoins ‘have not proved stable at all,’ Bank of Italy says

The Bank of Italy analyzed how crypto winter could help form regulatory frameworks


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The Bank of Italy on Wednesday said the aftereffects of crypto winter made a “clearer case for policy interventions.” 

Italy’s top bank in a research report also emphasized the need to balance regulation with innovation. 

“Not all crypto activities and not all forms of crypto-assets need to be covered or should be covered by financial sector regulation, in particular where their issuance, trading and holding do not serve customers’ financial needs through a payment or investment function,” the bank said. 

Decentralization, which bank officials called “indeed elusive” and “often an illusion but sometimes a reality” may serve as “alternatives to long-established forms of entrepreneurship,” the report said. 

The 40-page paper not only looked into the broader crypto winter, but also the macro events that have happened since crypto took a downturn. 

Both Terra and FTX left long-lasting scars on the crypto industry, with the Terra collapse leading to the crypto market losing 30% of its value. Between Celsius, Three Arrows Capital and Terra, roughly $53 billion was wiped from crypto portfolios.

Officials overseeing FTX’s bankruptcy are still struggling to locate assets to pay back creditors, with $7 billion of liquid assets located. The defunct exchange owes around $8.7 billion to customers, according to a Monday court filing.

“Indeed, stablecoins – which are sometimes depicted as an efficient alternative in the market for cross-border payments – have not proved stable at all,” the paper noted, citing both the depegging of Terra’s stablecoin and the “run” on Tether.

Consumer crypto interest remains

But despite the volatility and risks, there’s no denying that the consumer interest has remained, the bank found. 

In April, a Morning Consult report found that investors stayed in crypto — though cold wallet usage jumped to 38%, a 58% increase from January 2022.

“We have also observed that these assets, from a market perspective, increasingly behave like traditional assets,” the central bank said in a statement.

The bank is pushing for the regulation of intermediaries to ensure financial conduct standards. 

Of persisting challenges, the paper said it’s necessary to debunk ”the ‘decentralization illusion’ by bringing to light that most protocols have core stakeholders…which may be anonymous but are able to steer the operations and potentially extract ownership benefits.”

The Bank of Italy called for a clear and comprehensive approach to crypto regulation, saying rules must also “define the role that traditional financial services institutions, such as banks, can have in the crypto space.”

It’s all designed to lead legislators to decide how to approach assets that do not fit into the existing regulatory classifications — of which the bank lists include “collateralized stablecoins” as well as “native tokens of programmable blockchains, utility tokens [and] protocols’ governance tokens.”

The bank pushed for cooperation between countries, saying crypto does not adhere to borders the way traditional finance does, and therefore requires “flexible and scalable” arrangements between countries. It does not give examples of those arrangements. 

The Bank of Italy is not the first bank to push for international cooperation. In May, the Norwegian Central Bank advocated for an international regulatory framework.

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