New Fed Report Ranks Stablecoin “Threat” as Similar to US-China Tensions and Climate Change
In the latest Financial Stability Report released Monday, the US Federal Reserve ranked cryptocurrencies and stablecoins as one of the top risks to US financial stability over the next 12 to 18 months.
Fed Risk Matrix Ranks Cryptos and Stablecoins Just Behind US-China Tensions
The Fed report is printed twice a year, once in the spring and again in the fall, and the current edition features this chart below from page 67, which rates crypto/stablecoins as the fifth biggest risk to financial stability — tucked between the US- Tensions and climate problems in China.
Why are stablecoins such a threat?
The report section on stablecoins described them as digital assets issued and traded on blockchains, which are alleged to be linked to a stable off-chain asset such as gold, fiat currencies or government bonds. The report also noted that the value of stablecoins has increased exponentially over the past 12 months to $130 billion as of October 2021.
Here are the top concerns identified in the Fed’s release:
- The largest stablecoins by market capitalization promise to be exchangeable at any time at a stable value in US dollars, but each token is not necessarily backed 1:1 with a fiat equivalent. Instead, some stablecoins are backed by commercial bonds, which can lose value or become illiquid. If those assets lose value, issuers may not be able to meet redemption requirements.
- Stablecoins have structural weaknesses, similar to certain money market funds, that make them prone to liquidation by investors who can clear their accounts in one go.
- The report argues that these shortcomings may be exacerbated 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 potential may also pose risks to payment and financial systems.
Whether the specific stablecoin threats are real or exaggerated FUD, they were real enough for members of the Fed to include in this report. However, it can be argued convincingly that all four points listed as stable currency vulnerabilities can also apply to most fiat currencies, including the US dollar. This is especially true when considered in the context of the government’s fiscal and monetary policies in recent years.
On the other hand
- As mentioned in the last paragraph, the risks and criticisms they associate with stablecoins can all be applied to fiat currencies as well.
- It’s laughable that the Fed believes cryptocurrencies and stablecoins are just as threatening to US financial stability as US-China tensions and global warming.
Why should you be concerned?
The government sees stablecoins as a threat to its sovereignty. Their opposition to stablecoins is a good indication that stablecoins are a good idea for us.
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