The Federal Reserve’s Most Recent View on Stablecoins
Given the fast increasing digital asset markets, the Fed emphasized “structural fragilities” in the sector in its Monetary Policy Report to Congress, as exemplified by “the drop in the value of certain stablecoins.”
Despite not mentioning the algorithmic stablecoin – UST – that brought the broader market down in May, the Fed alluded to the project as a sign of the industry’s floating fragility. The Central Bank is more concerned about fiat-backed stablecoins, which have a considerably higher degree of concentration and capitalization.
Given that USDT, USDC, and BUSD have accounted for the vast bulk of the stablecoin market value, the Fed cited a lack of transparency regarding the underlying assets that support them, as well as the fundamental risk associated, which could compound the asset’s susceptibility.
- “Stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors and potentially to the fi nancial system, including susceptibility to potentially destabilizing runs.”
Previously, the President’s Working Group — a collaboration between the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission – expressed a similar issue, stating that stablecoin issuance should be limited to insured depository institutions. The government concluded that applying a clear criterion on which institutions are allowed to issue stablecoins will reduce the risk associated with this sort of asset.
- “The increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”
