In her first press conference as president of the European Central Bank (ECB), Christine Lagarde pledged to get “ahead of the curve” in the evolving environment of “stablecoins,” considered to be less volatile versions of blockchain currencies because of their peg to a pool of assets.
Speaking at a Dec. 12 press conference, Lagarde’s topline message was that the European Union’s central bank would continue with “highly accommodative” monetary policy to buoy inflation. She dedicated part of her remarks, however, to addressing the ECB’s policy perspective on digital currencies.
The ECB chief said that “given the developments we are seeing, not so much in the bitcoin segment but in the stablecoins projects,” the ECB needs to be “ahead of the curve” because “there is clearly a demand out there that we have to respond to.”
Watch again: Lagarde on digital currencies pic.twitter.com/L2HSjVZ2BD
— European Central Bank (@ecb) December 12, 2019
Some blockchain currency specialists, including Tuur Demeester, founding partner of Adamant Capital, said Lagarde’s remarks suggest the ECB would make some kind of inroads into the stablecoin market.
“Looks like the ECB will be entering the stablecoin business,” Demeester said in a tweet.
In her speech, Lagarde referred to a white paper on stablecoins (pdf), produced by a Group of Seven (G-7) working group chaired by Benoît Cœuré, head of the Committee on Payments and Market Infrastructures (CPMI). The paper sought to examine the challenges, risks, and benefits that global stablecoins may pose.
“As a new technology, stablecoins are largely untested, especially on the scale required to run a global payment system,” Cœuré said in a press release that followed a September discussion at the Bank for International Settlements (BIS) on policy and regulatory issues posed by the emergence of stablecoin initiatives backed by financial institutions and big tech. “They give rise to a number of serious risks related to public policy priorities. The bar for regulatory approval will be high.”
In its report, the working group noted potential benefits of a less volatile digital currency like stablecoin but called for a better understanding of the risks.
“Stablecoins, which have many of the features of earlier cryptocurrencies but seek to stabilize the price of the ‘coin’ by linking its value to that of a pool of assets, have the potential to contribute to the development of more efficient global payment arrangements,” the Bank for International Settlements (BIS) said, introducing the paper.
“The working group report finds that stablecoins, regardless of size, have implications ranging from anti-money laundering efforts across jurisdictions to operational resilience (including for cyber security), consumer/investor and data protection, and tax compliance. Global stablecoins may amplify those challenges and could also pose challenges to competition policy, financial stability, monetary policy and, in the extreme, the international monetary system,” the BIS noted.
The former International Monetary Fund (IMF) chief said the ECB had also set up a task force “to make significant strides toward establishing and achieving clear objectives for the development of its own digital currency.” She said the central bank had already conducted experiments and “pilots here and there” and that the task force would formulate more strictly defined project objectives for its own digital currency.
“Are we trying to reduce cost? Are we trying to cut out the middleman? Are we trying to have inclusive finance at all costs–at no cost? There’s a whole range of objectives that can be pursued, so I think we will start by doing that,” Lagarde said.
Lagarde said that besides discussions on “this sort of glamorous central bank digital currency, much talked about and worth exploring,” the Eurosystem already has in place digital payment systems, which she hoped would be adopted more widely.
“So on those digital systems that exist, some of which need a better take-up by some of the members of the system, I will continue to push because I think we have something which is really worth developing and encouraging. I’m talking here about TIPS and PEPS and all those acronyms that I should not be using, but I don’t know what they stand for. All I know is that they deliver in digital terms the operations of clearing and settling, sometimes in one single operation,” Lagarde said.
EU Finance Ministers Tepid on Stablecoins
Lagarde’s comments on stablecoins and digital currencies come just weeks after European Union finance ministers put a freeze on the launch of stablecoins until the bloc has formulated a strategy to mitigate the risks posed by the technology.
“These initiatives should not undermine existing financial and monetary order as well as monetary sovereignty in the European Union,” the European Council and Commission said in a joint statement.
The finance ministers added 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.”
While acknowledging the potential benefits of stablecoins, including cheaper and faster cross-border payments, the ministers said these technologies pose “multifaceted challenges and risks related, for example, to consumer protection, privacy, taxation, cyber security and operational resilience, money laundering, terrorism financing, market integrity, governance, and legal certainty.”
“When a ‘stablecoin’ initiative has the potential to reach a global scale, these concerns are likely to be amplified, and new potential risks to monetary sovereignty, monetary policy, the safety and efficiency of payment systems, financial stability, and fair competition can arise,” they said.
The ministers called for greater clarity around the legal status of stablecoin arrangements.
“Some recent projects of global dimension have provided insufficient information on how precisely they intend to manage risks and operate their business. This lack of adequate information makes it very difficult to reach definitive conclusions on whether and how the existing EU regulatory framework applies,” they said.
Saga Launches Stablecoin to Rival Facebook’s Libra
Recently, a blockchain firm advised by Myron Scholes, co-creator of the famed Black-Scholes model of derivative valuation for which he won the Nobel prize, launched a new stablecoin that the company hopes will revolutionize cross-border exchange and become a global currency.
Saga said in a press release that its brand of cryptocurrency is different from volatile blockchain-based currencies like Bitcoin because it resembles central bank-issued money and so would be useful as a more stable asset for storage of value and cross-border exchange.
“SGA is the first digital currency that replicates the mechanics of central bank national currencies and applies them on a global scale,” the company said, adding that its stablecoin “acts as a bridge bringing digital currencies into the mainstream.”
“Saga has been designed with the global economy in mind and to overcome the challenge of buying globally whilst only being able to pay nationally,” said Liquid, a cryptocurrency exchange that has just announced that it would list the stablecoin on its platform for secondary trading. “Saga has developed a system that means a truly global currency can come into existence—away from national or political tensions.”
Saga’s currency is similar to Facebook’s Libra in that it is pegged to a basket of fiat currencies. Unlike Libra, which is based on a set of currencies of Facebook’s own designation—including the U.S. dollar, Japanese yen, and the Singapore dollar—Saga’s stablecoin would be pegged to the IMF’s Special Drawing Right (SDR). This is an international reserve asset composed of a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
“This acts as a stabilizing mechanism to reduce volatility,” Saga said in the release, explaining the rationale of pegging to the SDR.
“The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar,” the IMF said. “After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.”
The IMF said that while SDRs are neither a currency nor a claim on the IMF, they act as a “potential claim on the freely usable currencies of IMF members” and so can be exchanged for these currencies.
The downside of most cryptocurrencies is their extreme volatility, which, while attractive to speculators, can constrain their usefulness as a medium of exchange and store of value. Saga, like Libra, seeks to address this gap in the market.
“Hyper-volatile currencies, which lack a monetary policy, are usually anonymous,” said Saga founder Ido Sadeh Man, according to TechCrunch. “Stablecoins are pegged to other assets, thus preventing their organic growth, and major players in this space are opaque concerning their funds. Saga’s economy model is designed to allow growth. Participants are obliged to undergo a Know Your Customer process, assuring Saga’s economy is compatible with traditional financial institutions.”
With ambitions to serve as a global currency, Saga claims to have built “a robust monetary model and effective system of governance.”
“The proceeds of issuing new SGA tokens are kept in a reserve, held in regulated banks, and stored in liquid assets that replicate the currency composition of the SDR,” the company said.