Fed Says “recent strains” In Stablecoin Market Demonstrate Fragility Of The Ecosystem

In the latest report, the Federal Reserve highlights that the stablecoins, due to their lack of “safe reserves” and transparency, put the financial system at risk. 

Fed Points Out The Risks Associated With Stablecoins

According to the Federal Reserve, Stablecoins could threaten the financial system.

The central bank of the U.S, in the Monetary Policy Report submitted today to Congress, stated that the recent crypto crash and the dramatic fall of certain stablecoins and downturn in the value of other digital assets show how fragile such structures are!

Furthermore, the report notes that the investors and, most likely, the complete financial system are endangered by the stablecoins that are neither subject to proper regulatory standards nor backed by safe and sufficiently liquid assets. The stablecoins could also impose vulnerability to potentially destabilizing runs.

For the uninitiated, stablecoins are digital assets that maintain a ratio of 1:1 and are backed by an underlying asset, for instance, the U.S dollar. While some issuers depend on complex algorithms for retaining the ration, some rely on backing their coin with reserves. 

UST collapse has brought the spotlight to the stablecoins, and the government is especially monitoring these assets. UST is an algorithm-backed stablecoin that is pegged to the Terra blockchain.

Though the report by Fed didn’t mention Terra directly, it seemed to indicate towards it as it mentioned the wild effect on markets could happen because of damaged stablecoins. 

The report also had criticism for stablecoin regarding its lack of transparency among the issuers of stablecoins concerning risk and reserve liquidity. It also pointed out that since stablecoins are mostly used as collateral for leveraged trading, they can lead to a further rise in market volatility and increase risks of non-redemption by issuers.

In recent weeks, Janet Yellen, the Treasury Secretary, has been among the many officials who have raised similar concerns like the Federal Reserve. Besides, even before the Terra collapse, she clearly stated that she sought to create a proper regulatory framework for stablecoins.

Meanwhile, this month, a bipartisan crypto bill was introduced in the Senate. This bill also seeks “a strong, tailored regulatory framework for stablecoins.” The centralized stablecoin issuers will be required to guarantee 100% reserve backing for their product if passed. 

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

Latest posts by Nancy J. Allen (see all)