ECB Sounds Alarm Over Linkages Between Stablecoins and Conventional Financial Markets

The search for higher yields amid rising inflation and falling interest rates has led investors to take greater risks, making a broad section of the market, including crypto, vulnerable to corrections, the European Central Bank (ECB) said.

• The ECB acknowledged that cryptocurrencies have grown in popularity and relevance, and said that the crypto markets are subject to “speculative bouts of volatility.”
• The increasing use of leverage by crypto investors can lead to “large, concentrated losses,” the central bank said in its bi-yearly financial stability review, which was released on Wednesday.
• The ECB also warned against the growing link between stablecoins, cryptocurrencies that are pegged to fiat currencies, and the traditional financial market.
• The central bank has been discussing the creation of a central bank digital currency (CBDC) since the start of this year, and in July said it decided to launch the investigation phase of a digital euro project that would last 24 months.
• Fabio Panetta, a member of ECB’s executive board, earlier this month laid out a detailed roadmap for CBDC inclusion.

Read more: ECB’s Panetta Says Digital Euro Should Expand Overall Payment Solutions