- Stablecoins Would Affect Financial Stability Negatively – Federal Reserve
- Price Volatility Problem with Stablecoins
- Non-regulation of Stablecoins Could Also Have a Negative Impact
Cryptocurrency News Today – the whole world is moving toward the creation of digital currencies backed by national fiats. The Federal Reserve of the United States Central Bank has expressed its concern for the concept of a “global stablecoin.” This comes as China makes a move to launch its digital yuan.
Stablecoins can impact the global economic ecosystem
Earlier this month, the Board of Governors at the Fed released a Financial Stability Report and global stablecoins were discussed in them. In the report, stablecoins were described as a type of cryptocurrency and warned that they could have massive implications if implemented globally. The report considered the monetary policy, financial stability, terrorist financing and money laundering aspect of stablecoins.
It highlighted that stablecoins could indeed be a medium of exchange but it could affect financial stability if it is not properly designed and regulated.
Problems of volatility reduced with stablecoins
All cryptocurrencies are plagued with volatility and this is why it isn’t a widely used payment instrument yet. The report states that stablecoins address this issue as they tie their value to assets or baskets of assets. Libra is one of such projects.
However, the Fed has stated that Libra’s development should be halted until all concerns are addressed. Libra was also mentioned in the report as a mainstay between the central bank regulation and cryptocurrency. It was referred to as a global stablecoin and the Fed believes it can achieve widespread adoption.
Another issue discussed in the report is the financial design. The Fed stated that an unregulated stablecoin could mark doom for the global financial ecosystem. It also highlighted how a lack of clarity in stablecoins could lead to a liquidity lock. The impact of this would be a domino effect where stablecoin holders retrieve fiat consecutively leading to a run.
What the Fed is describing is the worst-case scenario where bank account holders appear at the same time to withdraw their money. The effect could affect the bank as well as the stablecoin issuer.
The end result of such an occurrence is severe consequences for international or domestic economic activity. It can also affect financial stability and asset prices.
The other issues include anonymity and money laundering as well as terrorist financing. The Feds emphasized on the need for stablecoins to follow all norms of terror financing, money laundering and other crimes.
Investors were advised to beware of any complexity while investing in such digital currencies. The Feds also advised companies issuing the coins to make the users aware of all rights and protections.