Destabilizing speculation

Fed Sounds Alarm on ‘Recent Constraints’ in Stablecoin Market

Key points to remember

  • A new report from the Federal Reserve mentions stablecoins and the risks they pose to the stability of the financial system.
  • The report says “recent strains” in the stablecoin market highlight the fragility of the ecosystem.
  • The report comes as government officials seek to implement a broad regulatory framework for crypto.

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Stablecoins pose a risk to the financial system due to their lack of transparency and often lack of “safe” reserves, according to a new report from the Federal Reserve.

Federal Reserve Highlights Stablecoin Risks

Stablecoins could endanger the financial system, the Federal Reserve reiterated.

In the Monetary Policy Report submitted Today in Congress, the US central bank asserted that “the collapse in the value of some stablecoins and the recent strains experienced by markets for other digital assets demonstrate the fragility of such structures.”

The report further states that “stablecoins that are not backed by safe and sufficiently liquid assets and that are not subject to appropriate regulatory standards create risks for investors and potentially for the financial system, including vulnerability. in potentially destabilizing races”.

Stablecoins are a type of cryptocurrency that aims to maintain a 1:1 ratio with an underlying asset such as the US dollar. Some issuers achieve this by backing their currency to reserves; others rely on complex algorithms. Stablecoins have increasingly come to the attention of government officials and regulators in recent weeks thanks to the dramatic collapse of UST, an algorithmic stablecoin pegged to the Terra blockchain.

While the Federal Reserve report stopped short of mentioning Terra by name, it did seem to allude to the protocol as an example of the kind of damage stablecoins are capable of inflicting on markets.

The report further criticized the lack of transparency among stablecoin issuers regarding risk and reserve liquidity. He also warned that stablecoins are commonly used as collateral for leveraged trading, which could potentially “amplify [market] volatility” and increase the risk of non-reimbursement by issuers.

Treasury Secretary Janet Yellen is one of many officials to have echoes the sentiments of the Federal Reserve in recent weeks, and it had made it clear that it wanted to establish a regulatory framework for stablecoins even before Terra collapsed.

A bipartisan crypto bill introduced in the Senate this month also called for “a robust and responsive regulatory framework for stablecoins”; if passed, it will require centralized stablecoin issuers to guarantee 100% backing support for their products.

Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies.

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