Stablecoins pose more risk to financial stability: Lagarde

Christine Lagarde believes that stablecoins and Facebook’s Libra coin pose more risk to financial stability and the current monetary sovereignty than Bitcoin

The president of the European Central Bank (ECB), Christine Lagarde, believes that Bitcoin and other cryptocurrencies don’t pose any threat to global financial stability. Instead, she thinks that stablecoins and Facebook’s Libra coin could pose more risk to financial stability and monetary sovereignty.

Lagarde made her views known in an article published yesterday in the magazine L’ENA hors les murs. The ECB president shared her view on the future of money and touched on various topics, including Bitcoin and other cryptocurrencies.

She started by acknowledging the importance of technologies like blockchain, which has helped bring new opportunities and risks into the global financial system. She pointed out the apparent strength of cryptocurrencies where there is no need for a trusted third-party intermediary in transactions thanks to the cryptographic proofs and integrity of records put in place by the distributed ledger technology (DLT).

According to Lagarde, the only threat to cryptocurrency is the lack of a stable value. She stated that “users cannot rely on crypto-assets maintaining a stable value: they are highly volatile, illiquid and speculative, and so do not fulfil all the functions of money”.

Stablecoins are risky

Lagarde went on to point out that unlike Bitcoin, stablecoins pose severe risks to financial stability despite their ability to drive additional innovation in payments and boost integration of social media, trade and other platforms.

The former International Monetary Fund (IMF) chief added that stablecoins try to solve the lack of stability and trust problems of regular cryptocurrency by pegging their coins to the stable and trusted fiat money issued by States.

Lagarde warned that if stablecoins like Facebook’s Libra gain widespread adoption, they could threaten the current financial stability and monetary sovereignty. She pointed out that if the issuer of a stablecoin cannot guarantee a fixed value for their coin or are perceived as incapable of absorbing losses, they would likely suffer.

She further stated that “using stablecoins as a store of value could trigger a large shift of bank deposits to stablecoins, which may have an impact on banks’ operations and the transmission of monetary policy”.

The ECB president is wary of the control of stablecoins by global tech firms. She believes it could present risks to competitiveness and technological autonomy since the companies would leverage their competitive advantage and control of large platforms.

Overall, Lagarde believes the dominant position of the tech companies could deter competition and harm consumer choice. It could also raise concerns over data privacy and the misuse of personal information.