Fed Views Stablecoins as a Financial Instablity, Urges Regulators to Step in

On Friday, the Federal Reserve released its latest “Monetary Policy Report”. It categorizes the stabilitycoin industry, particularly algorithmic stablecoins, as a threat to financial instability. It expressed concern about the high concentration of fiat-backed unstablecoins on Tether’s USDT and Binance’s BUSD.

Fed’s latest take on Stablecoins

The rapidly expanding digital asset markets have led to the Fed highlighting the “structural fragilities” in the sector in its Monetary Policy Report.

Although the Fed did not name the algorithmic stablecoin UST that caused the wider market to plummet in May, it suggested that the project was an indicator of industry floating fragility. The Central Bank is more concerned about fiat-backed stabilitycoins, which have a higher degree of concentration or capitalization.

USDT, USDC and BUSD account for the vast majority of stablecoin market capital. The Fed highlighted a lack in transparency about the underlying assets backing them, as well as the fundamental risks involved, which may increase the vulnerability of an asset that is meant to be pegged 1:1 with USD.

“Stablecoins without safe and sufficient liquid assets, and not subject to appropriate regulatory standards, create risks for investors and possibly to the fi nancial sector. This includes susceptibility to potentially destabilizing run.”

The President’s Working Group consists of the Federal Reserve, Securities and Exchange Commission and the Commodity Futures Trading Commission. It was previously concerned about limiting stablecoin issuance for insured depository institutions. The agency believed that limiting stablecoin issuance to eligible institutions could reduce the risk associated with this asset by establishing a clear criteria.

The Fed also recommended clear regulations for the use of stablecoins in leverage trading.

“The increased use of stablecoins in order to meet margin requirements for leaded trading in other cryptos may increase volatility in stablecoin demand and increase redemption risk.”

US Government Agencies on Stablecoins

In recent weeks, stablecoins have been increasingly in the spotlight of regulators and government officials due to the dramatic collapse of Terra’s UST. After such an unfortunate event, SEC Commissioner Hester Perce stressed the need to regulate these assets using a “trial-and-error” approach.

“There are many options to approach stablecoins… and with experimentation, it is important to allow for failure.”

Janet Yellen, US Secretary of Treasury, stated that stablecoins were not properly supervised in the United States. She recommended that legislators “act quickly” for a regulatory framework.

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Marla Brooks

Marla Brooks – Financial Analysis My name is Marla Brooks, and I am the mainstream behind the”observednews.com”  for the powerful and most delicate insights into the latest activities in the financial analysis category. I started my journey as an independent financial consultant. I had approximately nine years of experience in this field. I am free soul so; my passion for exploring the world has taken me to the nations across the globe and given me the chance to report for a portion of the best news associations. Currently, I am a full-time editor as experienced in finance and started to use my abilities.

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