Fed ranks cryptocurrencies and stablecoins as the top 5 risks to US financial stability

In the current financial stability report announced On Monday (November 8th), the US Federal Reserve (Fed) classified cryptocurrencies and stablecoins as the greatest risks to US financial stability over the next 12 to 18 months.

The Fed’s report appears twice a year, once in the spring and again in the fall, and the latest report includes the chart below, starting on page 67, which classifies cryptocurrencies and stablecoins as risky, the fifth largest risk to the country’s financial stability.

The greatest risks to the US economy | Source: Fed

Why stablecoins at all?

The stablecoins reporting section described them as digital assets that are issued and traded on blockchains that are said to be tied to a stable off-chain asset such as gold, fiat currency, or government bonds. The report also notes that the value of stablecoins has more than quintupled in the past 12 months to $ 143 billion today.

Total capitalization of stablecoins | Source: Coinecko

Here are the main reasons for concern cited in the Fed paper:

• The largest stablecoins in terms of market capitalization promise to be convertible into Fiat at any time, but not every token is necessarily backed 1: 1 with the corresponding USD. Instead, some stablecoins are backed by commercial bonds that can depreciate or become illiquid. At this point, the issuer may not be able to meet the buyback request.
• Stablecoins share the same structural weaknesses as certain money market funds, making them prone to liquidation by investors who can empty their accounts all at once.
• The report says these shortcomings can be compounded by a lack of transparency and governance standards regarding some of the assets that support stablecoins.
• Finally, the potential use of stablecoins in payments and their growth could also pose risks to the payment and financial system.

The report is over 80 pages long and covers many topics other than cryptocurrencies and stablecoins. The Fed previously stated in the document that the purpose of the report is to express its opinion on the resilience of the US financial system while working to “promote public understanding, transparency and accountability for the Fed’s position on the matter to improve”.

Whether the stablecoin threats are real or just an exaggerated FUD is enough for Fed members to include in the report. However, it can be convincingly argued that all four of the reasons mentioned are weaknesses of stablecoins, which also apply to most fiat currencies, including the US dollar. This is particularly true in connection with the government’s fiscal and monetary policy in recent years.

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