On 14 September 2020, a joint statement on stablecoins was released by the ministers of finance for Germany, France, Italy, Spain, and the Netherlands. The announcement comes ahead of the EU’s Digital Finance Strategy to be released later this month. It’s expected to cover crypto assets and stablecoins used for payments, following the consultation period, which started last December.
In response to the statement, European Commission EVP Valdis Dombrovskis noted the concerns of the ministers. “Rest assured that our legislative proposals will address those concerns comprehensively,” said Dombrovskis. But he continued: “Crypto assets provide many opportunities, and we want to regulate innovation in, not out.”
The joint statement stresses the importance of the framework to strengthen “Europe’s influence and consolidating its economic autonomy in the field of payments.” Above all, a stablecoin regulatory framework must prioritize preserving monetary sovereignty and protecting EU consumers. As always, any plans should adhere to GDPR privacy legislation and anti-money laundering/counter-terrorism financing (AML/CTF) requirements.
“If the risks of private activities get out of hand as a result, this could impair the stability of the financial markets. In this case, we think there would have to be a ban (on stablecoins),” said Olaf Scholz, German Finance Minister at the unveiling of the statement. He continued: “The private sector simply issuing currencies – that will not happen with our support.”
The joint statement stresses five general principles. The two most relevant were left to last. One is the ability for the currency to be redeemable at all times into the asset-backed legal tender. Some stablecoins don’t allow this. And the operating entity has to be based in the EU.
This last point comes at a crucial time as the EU makes preparations for deciding on whether to release a central bank digital currency (CBDC). The statement stresses that “no global asset-backed crypto-asset arrangement should begin operation the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.” By having stablecoin firms be registered in the EU before starting any activity, the EU retains regulatory oversight, giving them control over authorization timing. This means stablecoins firms may be impacted depending on when the EU decides to issue CBDCs.
The other three requirements are that each stablecoin must be backed at a ratio of 1:1 with fiat currency. Any assets eligible for the reserve must be limited to deposits in EU-approved credit institutions or a proportion in highly liquid assets that are subject to appropriate safeguards. These assets must be denominated in the Euro or the currency of an EU member state. The reserves must be segregated and be non-convertible to avoid exchange risk.
The road to stablecoin clarity
The EU has been researching the risks and benefits of stablecoins for some time now. In October 2019, the G7 released a Working Group Report on Stablecoins for the first time outlining the potential for systemic risk following Facebook’s Libra unveiling. In May this year, the ECB published a paper on global stablecoins, with a focus on the potentially significant risks to financial stability that stablecoins may present. For example, if there was a run on a stablecoin that was in widespread use.
At the Deutsche Bundesbank virtual conference last week, the President of the European Central Bank (ECB) Christine Lagarde gave a speech that covered Central Bank Digital Currencies (CBDC). At the same event, the Governor of the Banque de France François Villeroy de Galhau gave a forceful talk in favor of the digital euro.