News today shows the European Central Bank is coming out with some additional guidance on stablecoins that investors may find welcome.
There’s an excellent point being made in a new study on the use of stablecoins that suggests they really should be categorized in the jargon that we use to describe them.
Specifically, ECB notes four core categories of stablecoins hat are important in explaining what these assets are: tokenized, off-chain collateralized, on-chain collateralized and algorithmic stablecoin systems. ECB also describes “global” stablecoins against regional systems:
“Stablecoins can also be distinguished on the basis of their geographic scope, whereby ‘global’ stablecoins would encompass multiple jurisdictions in terms of their users, the entities comprising the arrangement, and the composition of the collateral (if relevant).”
Defining stablecoins as “digital units of value that are not a form of any specific currency,” ECB goes over some of the value of having collateralized stablecoins, and some of the issues around consistency in evaluation:
In Europe, the financial community uses something called a “single supervisory mechanism” or SSM to regulate stablecoins.
“The European Union (EU) and Eurosystem regulatory and oversight response should follow the principle of ‘same business, same risks, same rules’ to ensure a level playing field,” writes a study author, “by applying existing requirements as appropriate and closing gaps …in a manner consistent with the guidance of international standard setting bodies. Appropriate accounting and prudential treatments should be identified in a timely fashion. Overseers and supervisors should strengthen cooperation arrangements in the light of ecosystems spanning multiple jurisdictions.”
Why is this type of analysis important? In part because, although the United States and other larger countries have been fearful of stablecoin outcomes from proposed global giants like Facebook’s Libra (which has not yet come to fruition), too many citizens don’t understand what stablecoins are, or why they matter. If you’re in the crypto world, evaluating the use of various stablecoins, whether they are private sector assets like JPM Coin or CBDCs, helps you to plan your investment strategy overall.