Europe says no to stablecoins until grey areas are gone

The European Commission and European Parliament have dealt a blow to the likes of Facebook’s Libra initiative until they can write the appropriate rules.

In a joint statement, the duo has championed the potential benefits of cryptocurrencies, but also warned of the dangers. Under current European regulations, it is not entirely clear how the emerging segment will be governed, therefore the bureaucrats are taking a firm stance before irreversible steps forward have been taken.

“As underlined by the recent report of the G7 working group dedicated to these issues, global ‘stablecoin’ projects and arrangements should not come into operation until all of these risks and concerns are properly addressed,” the statement reads.

“We re-affirm our willingness to appropriately tackle the challenges raised by these initiatives on the basis of an EU common understanding and coordinated approach.

“In view of the above, the Council and the Commission state that no global ‘stablecoin’ arrangement should begin operation in the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.”

A stablecoin is a digital current which is pegged against the price of physical assets, such as a commodity. Cryptocurrencies can then be linked to the stablecoin, in an effort to reduce price volatility. With a lack of understanding in the cryptocurrency market today, losses can be extraordinary, evident by the dramatic crash of Bitcoin in early 2018.

In theory, the stablecoin concept is logical. It provides stability to the market as it is pegged against less-volatile assets, thus creating more confidence and safety in digital currencies. But as with everything new, the list of unknowns is far greater than the list of knowns. When dealing with people’s money, bureaucrats tend to side with caution.

Although this will certainly slow the development of cryptocurrency almost to standstill, it is perhaps necessary. The technology industry has demonstrated time and time again it is not responsible enough to manage innovation or self-regulate. The last decade has seen numerous examples of what happens when a technology drives forward too quickly without paying consideration to the ‘law of unintended consequences’; just look at the Cambridge Analytica scandal for evidence.

The European Union and European Parliament are calling for a pause for thought, to create a globalised, evidence-based approach for a regulatory and oversight mechanism. The duo wants to ensure appropriate standards of consumer protection and orderly monetary and financial conditions are in place before the industry is allowed to run free.

The idea of stablecoins are of course a good thing. The potential for convenient, fast, efficient and inexpensive payments, especially cross-border, is evident, though such a sensitive segment as digital finance needs to be managed appropriately.