At the Economic and Financial Affairs Council (Ecofin) in early November 2019, EU finance ministers discussed the issue of crypto-assets and ‘stablecoins’ – crypto-assets that are pegged or linked to one or more real-world currencies or other traditional assets. At the meeting on 5 December, they published a statement setting out their views on the opportunities and challenges these digital assets present. These discussions follow the announcement in June by Facebook that it planned to launch ‘Libra’, its own crypto-asset, in 2020. There is now a broad understanding, in the EU and beyond, that while they offer opportunities for cheap and fast payments, ‘stablecoins’ also present a number of risks that will need to be addressed.
Pros and cons
The European Commission is closely following market developments in the area of crypto-assets and has been for the last couple of years. In order to compete globally, Europe needs to embrace technological change, including in the financial sector, and make sure that EU rules do not inadvertently hinder innovation. At the same time, the application of new technologies in the financial sector can bring new risks that need to be regulated and supervised in a way that ensures financial stability and consumer protection.
Crypto-assets present a number of opportunities. For example, they offer an alternative funding source for start-ups. Between January 2017 and January 2019, for instance, the capital raised through initial coin offerings and private token sales amounted to €24 billion globally. ‘Stablecoins’, such as Libra, (that are a subset of crypto-assets) can represent a useful tool for cheaper cross-border money transfers and payments. They can also contribute to financial inclusion, by offering a digital asset to the approximately 8% of the EU population that do not have a bank account.
At the same time, ‘stablecoins’ and crypto-assets present a number of potential risks and challenges. Consumer protection, cyber security and market integrity, for instance, are just a few of the areas that need to be addressed. Global ‘stablecoins’ – which could be widely adopted by consumers and merchants – such as Facebook’s Libra, raise additional challenges in terms of financial stability and monetary sovereignty.
Which rules apply?
An important issue when it comes to ‘stablecoins’ and crypto-assets is being able to clearly determine exactly what they are and which rules, if any, apply to them. Some crypto-assets fall under existing EU law, but most of them do not. This can leave consumers exposed to substantial risks. The Commission is screening and assessing existing legislation to check if it can be effectively applied to this type of asset or if amendments or guidance is needed. For crypto-assets that fall outside the scope of existing EU law, the Commission is assessing whether an ad hoc EU framework is warranted. Vice-President Valdis Dombrovskis, at his confirmation hearing before the European Parliament on 8 October 2019, said that he intends to propose a legislative framework that will cover all crypto-assets, including ‘stablecoins’ and cryptocurrencies. Such a framework should ensure legal certainty for innovators and investors, while addressing for example consumer risks, as well as risks to market integrity, market fragmentation and financial stability.
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