New Fed Report Repeats Warning About Stablecoins
The U.S. government considers stablecoins as a potential threat to the stability of the financial system, with both the Federal Reserve and a senior Treasury official saying Monday the tokens could experience dangerous customer runs.
The semi-annual Financial Stability Report from the Fed said that while “most digital assets do not pose risks to global financial stability at this time,” so-called stablecoins could if they became more widely used.
“There is a risk that widespread use of certain stablecoins could create new challenges for financial stability,” the report said
As the Feds again expressed their doubts about the sector, terraUSD (UST), which mints LUNA lost its peg to the dollar on Monday for a second time in three days. UST, one of the top stablecoins in circulation, dropped well below $0.85 at one point late Monday.
The Financial Stability Report signaled the risk of sudden, desperate redemptions of stablecoins. Stablecoins are digital assets that aim to maintain a stable value despite volatile markets. UST is a dollar-backed stablecoin, meaning each UST is redeemable for one U.S. dollar.
The report did say that digital assets have the potential to “improve” the payments system, but that more work needs to be done on understanding the risks they pose.
“Digital assets have the potential to improve the efficiency and inclusiveness of the financial system,” the report said. “However, before that can happen, a broader and deeper public understanding of these assets is needed.”
The report went on to say that “regulators and policymakers should continue to monitor developments” in the digital asset space.
This is not the first time that the Fed has sounded the alarm about stablecoins. In a report last month, the central bank said that such coins could pose a “significant challenge” to the existing monetary system.
The November edition of the financial report also included a similar warning.
“The proliferation of private stablecoins could pose challenges to monetary policy transmission and financial stability,” the report said. “If widely adopted, they could affect the demand for Federal Reserve liabilities, including currency.”
Despite the warnings from the Fed, several major companies have launched their own stablecoins in recent months. Facebook’s Libra coin is perhaps
“These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins,” according to the report, which noted that the market is concentrated with more than 80% of its activity in three names: tether (USDT), USDC and binance USD (BUSD).
The study comes as the U.S. Treasury Department is preparing to regulate stablecoins, and lawmakers have called for more oversight of the burgeoning industry.
For its part, the Fed said that while it doesn’t currently oversee stablecoins, it’s “closely monitoring” developments in the space.
“The Federal Reserve will continue to evaluate whether there are additional risks posed by stablecoins and other digital assets that require supervisory attention,” the report said.
U.S. regulators, including Securities and Exchange Commission Chair Gary Gensler, have sometimes compared stablecoins to money-market funds.
“Money market funds are highly regulated, but there is no such comprehensive regulation for stablecoins,” Gensler said at a Senate hearing last month.
Last year, the Fed released a report on digital currencies that said stablecoins could pose risks to financial stability and consumer protection. At the time, the central bank didn’t name any specific asset.
A Senate bill introduced last week would require digital currency exchanges to comply with anti-money laundering rules. The proposal, co-sponsored by Sherrod Brown, the top Democrat on the banking committee, and Mike Crapo, the panel’s chairman, would give federal regulators more authority over digital currencies.
SEC Commissioner Hester Peirce has said she doesn’t think all stablecoins should be regulated as securities.