In terms of stablecoins, there is a notion that they are a safe window to have exposure to crypto-assets, but the authority considers its potential threats to the economy
Raising concerns are voiced by the United States Federal Reserves about the viability and reliability of stablecoins and also suggesting the use cases and utilities of alternatives backed by the government. On a wider note, the report discussed financial stability within numerous economic sectors; the Federal reserves identify the risks associated with the cryptocurrency stablecoins that are usually marketed or boasted themselves to have the backing of the US dollar like fiat currencies.
While suspecting the association of digital assets and projects related to blockchain technology to lose liquidity, the Fed said that the vulnerabilities in the structure persist at funds in the money market along with some other mutual funds and the rapidly evolving sector stablecoin, which is vulnerable to run.
Typically stablecoins aim to be convertible to dollars at par, but they usually are pegged by the assets that might lose the value in order to become illiquid during the tough times; hence they have to face risks while retrieval similar to those that are prime and money market funds having tax exemptions. Such vulnerabilities may worsen by a lack of transparency regarding liquidity and risks of the assets backing the respective stablecoins.
On top of that, the growing stablecoins used to meet margin requirements for other cryptocurrencies’ levered trading may multiply volatility in stablecoins demand and heighten risks for redemption. Just look at this week’s performance; the TerraUSD stablecoins with intentions to serve peg to the US dollar in 1 to 1 has plunged to as low as $0.45 on Wednesday.
The non-profit organization of Terra (LUNA) ecosystem of the Luna Foundation Guard (LFG) has responded to the crash of UST stablecoin by allocating $1.5 billion in crypto assets to support the price. Since then, Terra’s UST has recovered to $0.90 but has dropped almost by half.
Report of Federal Reserves continued to discuss the role central bank digital currency (CBDC) could play in order to fulfil the intention that stablecoins consist while operating under a regulatory framework.
Source: https://www.thecoinrepublic.com/2022/05/11/why-does-the-federal-reserves-state-that-private-stablecoins-are-vulnerable-in-its-new-reports/