Terra crash highlights financial stability risk to financial stability: ECB

A recent report from the ECB indicates that stablecoins are impractical as a method of payment and that their current form is not suitable for use in the real economy.

The European Central Bank (ECB) has released a report analyzing the growth of the cryptocurrency market over the past decade and the risks it poses to the existing financial system.

A section of the report devoted to stablecoins discussed the central role they play in the current ecosystem. Stablecoins are increasingly used to interconnect various blockchain networks and play a vital role in providing liquidity to the decentralized finance (DeFi) ecosystem.

The report further analyzed whether these stablecoins could find a place in the mainstream financial system, but concluded that a lack of regulatory oversight added to the recent downfall of algorithmic stablecoin ecosystems such as Terra (LUNA ), now called Terra Classic (LUC), indicates the contagion effects these stablecoins could have on the financial system. An excerpt from the report read:

“The largest stablecoins perform a critical function for the liquidity of crypto-asset markets, this could have far-reaching implications for crypto-asset markets in the event of depletion or failure of one of the greatest stablecoins."

It wasn’t just algorithmic stablecoins that weathered the slump during May’s crypto market crash, even the centralized stablecoin Tether (USDT) lost its peg for a while and recorded nearly 10% exits.

The ECB has also rejected the idea of ​​using stablecoins as a means of payment, saying they are impractical due to speed and cost, as well as their redemption terms and so on. .