Central banks in Italy and India have expressed concerns about stablecoins and called for a strict regulatory framework for the asset class. The Reserve Bank of India (RBI) provided a list of risks associated with the use of stablecoins in emerging economies, while the Bank of Italy (BdI) emphasized the volatility of this digital asset type.
The Reserve Bank of India released a financial stability report noting that stablecoins could cause serious harm to developing economies.
According to the RBI statement, stablecoins present the following threats to developing economies:
- National currency substitution. Stablecoins can substitute for the national currency because their underlying assets are usually denominated in foreign currencies.
- Uncertainty of financial stability. The lack of authenticated data and information gaps in the cryptocurrency ecosystem makes it difficult to assess financial stability risks properly.
- Impact on monetary policy. The presence of stablecoins in the economy can make it difficult for central banks to set domestic interest rates and liquidity conditions.
- Bypassing capital flow management measures. The decentralized and pseudo-anonymous nature of crypto-assets makes them attractive tools for circumventing capital controls.
- Credit risk undermining. Stablecoins, an alternative to the traditional financial system, can disrupt banks’ ability to raise funds and issue loans, undermining credit risk assessment.
- Increased potential for illicit use. The difficulty of tracking and monitoring P2P transactions using stablecoins could increase the potential for their use in illegal transactions.
According to RBI analysts, the stablecoin market needs strict regulation by government agencies to prevent possible financial disruptions and support the development of a decentralized financial ecosystem.
In turn, representatives of the Central Bank of Italy stressed the need for stricter control over the issuers of stablecoins. The BdI report highlights the instability of this type of digital asset. As an example, the bank representatives cited the consequences of the collapse of Terra in May 2022.
However, according to the Bank of Italy representatives, not all crypto-assets should be subject to financial regulation. In particular, we are talking about assets that do not serve customers’ financial needs, i.e., are not a means of payment or an investment instrument. For example, the Italian government supports blockchain technology in non-financial transactions related to decentralized identification, property rights, supply chain management, voting, and green initiatives.
Both central banks also emphasized the importance of global coordination and the creation of an international regulatory framework for stablecoins, given the global nature of the technology.
As a reminder, the RBI is actively working on creating a central bank digital currency (CBDC). For example, in December 2022, India launched a pilot retail CBDC, which more than 55 million people accessed. And RBI also entered into an agreement with the Central Bank of the UAE (CBUAE) to develop a bridge for CBDC to facilitate remittances in digital currencies.
Italy is also among the five countries with the lowest tax rates on cryptocurrency assets for citizens, and the local market for non-exchangeable tokens will exceed $670 million in 2022 thanks to the activity of Italian high fashion brands in the field of NFT.
