The European Central Bank has warned the global community about the dangers of so-called “stablecoin runs.”

The European Central Bank has warned the global community about the risks of so-called
The European Central Bank has warned the global community about the risks of so-called “stablecoin runs.” Stablecoins are backed by traditional currencies.

Stablecoin may occur similar to the term ‘bank runs’ in the conventional financial system if end users lose trust in the issuer or network. A bank run happens in traditional finance when customers simultaneously withdraw their deposits over the bank’s solvency concerns. The risk of default increases as more individuals withdraw their funds, causing more withdrawals.

“There are a number of events that could trigger a run on a stablecoin.” 

The central bank said some parts of the stablecoin arrangement could stop working during such a run. The bank said that many events could cause a run on a stablecoin. The bank listed cyberattacks on the system or theft of wallets and customer concerns about the value of stablecoin among the key triggers.

The ECB said in the report:

“Such a realization could trigger substantial redemptions of stablecoins which could be amplified to the extent that end users misconceive stablecoin holdings as a substitute of bank deposits.” 

LEAVE A REPLY

Please enter your comment!
Please enter your name here