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Italy’s top banking authority has called for a “robust, risk-based” regulatory framework for stablecoins that could help prevent the worst-case scenario – a run on stablecoins.
The central bank’s recently released June 2023 Markets, Infrastructure and Payment Systems report urged regulators to apply the same standards of financial conduct to stablecoin issuers in the industry.
#bankitalia #26June Alessandra #Perrazelli discussed about the evolving regulatory landscape for #DigitalAssets at @pointzeroforum Panel “State of Global Digital Asset Regulation: Navigating Opportunities in an Evolving Landscape”#PZF2023 #PointZeroForum @sif_sfi @elevandi pic.twitter.com/Jm0OBeifZh
— Banca d’Italia (@bancaditalia) June 26, 2023
The bank said that the rise of cryptocurrencies, combined with several “boom and bust cycles” in a largely unregulated environment, has caused “significant harm to consumers.”
In particular, regulatory attention to stablecoin issuers should be a priority due to their close association with DeFi, the bank said:
“Strongly risk-aware regulation of stablecoins to prevent “runs” on their issuers is essential to reduce the fragility of the DeFi ecosystem, given the prominence of this asset class in decentralized finance.”
“It is critical that stablecoin and DeFi policy interventions are well synchronized as stablecoin proliferation […] can drive new waves of DeFi innovation and strengthen the interconnection between traditional and decentralized finance,” he added.
The Italian Banking Authority also noted that stablecoins “haven’t proven stable at all”, citing the most notable crash of the algorithmic stablecoin TerraClassicUSD (USTC) in May 2022.
The adoption of #DLT solutions, especially if featured by weak organizational structures, could undermine the financial system due to lack of controls, lack of specific rules as mitigation tools, interdependence among regulated and non-regulated entities. The fragmentation is…
— Banca d’Italia (@bancaditalia) June 27, 2023
The bank said the industry also needs to debunk the “illusion of decentralization,” recognizing that most decentralized protocols are driven by key stakeholders who can often “benefit from ownership.”
“Such projects should be returned to traditional, accountable businesses as a precondition for operating in the regulated financial sector,” the bank added.
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However, the bank stressed that it is not necessary to subject every cryptocurrency asset or activity to financial services regulation:
“Not all crypto-currency activities and not all forms of crypto-assets should or should be covered by financial sector regulation, in particular when their issuance, trading and holding do not serve the financial needs of clients through a payment or investment function.”
Non-financial use cases for blockchain include decentralized identity, real estate, supply chain, voting, and carbon credits.
The Italian central bank also called on countries to cooperate and create an international regulatory framework, as the technology works regardless of national borders.