Italy's top banking authority has urged the establishment of a robust and risk-based regulatory framework for stablecoins to prevent potential risks and a worst-case scenario of a "run" on stablecoins. The central bank's recent report highlighted the need for applying the same financial conduct standards to stablecoin issuers in the industry. The unregulated nature of the cryptocurrency market, coupled with boom and bust cycles, has led to significant consumer harm, according to the bank.
Recognizing the close connection between stablecoins and decentralized finance (DeFi), the bank called on regulators, particularly, to prioritize stablecoin issuers. It emphasized the necessity of strong, risk-based regulation to prevent issuer runs, thereby reducing the v The sustainability of the DeFi ecosystem . The bank stressed the importance of synchronizing policy interventions on stablecoins and DeFi, as the proliferation of stablecoins could drive further innovation in DeFi and foster greater interconnectivity between traditional and decentralized finance.
Highlighting the instability of stablecoins, the Italian banking authority referred to the notable crash of the TerraClassicUSD (USTC) algorithmic stablecoin in May 2022. It also raised concerns about the illusion of decentralization, noting that many decentralized protocols are controlled by core stakeholders who can exercise ownership interests. The bank suggested that projects operating in the regulated financial sector should adopt traditional and responsible business structures, moving away from the illusion of decentralization.
While emphasizing the importance of a regulatory framework for stablecoins, the bank clarified that not all cryptographic activities and cryptoassets need to be subject to financial services regulation. It specified that only those activities directly serving the financial need s of customers through payment or investment functions should fall under financial regulation. The bank acknowledged the diverse non-financial use cases enabled by blockchain technology, including decentralized identity, real estate, supply chains, voting, and carbon credits.
Lastly, the Bank of Italy called for international cooperation to establish an international regulatory framework, considering the global nature of the technology that operates beyond national borders. It emphasized the need for countries to work together in developing harmonized regulations for stablecoins and related cryptoassets.
