Thursday, December 1, 2022

FED Sees Stablecoins As Financial Instability Due To Insufficient Liquidity

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The FED sees stablecoins as financial instability because of insufficient liquidity that can back their insurances so let’s have a closer look at today’s latest cryptocurrency news.

The FED sees stablecoins as being unstable and expressed concerns over them as not having enough liquid assets backing their issuances so let’s read more today in our latest cryptocurrency news. The Federal Reserve published its later Monetary Policy Report categorizing the stablecoin industry as a risk of financial stability and in the meantime, it expressed concerns about the concentration of the fiat-backed stablecoins on Tether and Binance BUSD.

Given the evolving digital asset marketplaces, the FED outlined the structural fragilities in the sector amid the collapse of the value of certain stablecoins. Though without naming Luna, which dragged the entire market to crash in May, the FED hinted at the proejct as an indicator of fragility in the industry. The fiat-based stablecoins with a higher degree of concentration and capitalization are of a big concern to the Central Bank.

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US Federal Reserve

Considering that USDC and USDT all accounted for the majority of the stablecoin market cap, the FED outlined a lack of transparency about these underlying assets that back them and the risks involved that could exacerbate the vulnerability of the asset meant to be pegged 1:1 to USD:

“Stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors and potentially to the financial system, including susceptibility to potentially destabilizing runs.”

The president’s Working Group which includes the Federal Reserve, the Securities and Exchange Commission, and the CFTC, shared a similar concern and argued for limiting the stablecoin issuance to the insured depository institutions. In addition, the FED recommended a clear set of regulations on using stablecoins for leverage trading:

“The increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”

Stablecoins have caught the attention of government officials and regulators in the past few weeks due to the crash of Terra’s UST and after the debacle, the SEC commissioner Hester Peirce urged the regulators to regulate these assets via a trial and error approach:

“There are different potential options for approaching stablecoins…and with experimentation, we need to allow room for there to be a failure.”

The FED recommended:

“The increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”

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