The European Central Bank ((ECB) has warned the global community about the risks of so-called “stablecoin runs.” Analogous to the term “bank runs” in the traditional financial system, stablecoin runs could occur if end users lose confidence in the issuer or its network, the ECB revealed in a recent report. In traditional finance, a bank run occurs when customers withdraw their deposits simultaneously over the bank’s solvency concerns. As more people withdraw their funds, the probability of default increases, triggering more withdrawals.
“There are a number of events that could trigger a run on a stablecoin.”
During such a run, the central bank said some parts of the stablecoin arrangement might stop functioning like that observed in the 2007 global financial crisis when securitization vehicles’ redemption was suspended. The bank said that several events could trigger a run on a stablecoin. Among the primary triggers, the bank listed cyberattacks to the system or theft from wallets and customer doubts on the value of the stablecoin. “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,” the ECB said in the report.
ECB President said the digital euro would not be a substitute for cash.
ECB President Christine Lagarde stated that the bank was exploring “the benefits, risks and operational challenges” of a European central bank digital currency (CBDC), but fiat currency would likely still play a role in this digital future. Earlier, the ECB president said that the Eurosystem had not yet decided on whether to introduce a digital euro, but said that a task force to study the potential effects of a CBDC on Europe would be announced “in the coming weeks.”