According to the Fed report, “Stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors.”.
The Federal Reserve’s Board of Governors has pointed to stablecoins as a potential risk to financial stability in a volatile crypto market.
In its Monetary Policy Report released on Friday, , the Federal Reserve’s Board of Governors said “the collapse in the value of certain stablecoins” — likely referring to TerraUSD (UST) becoming unpegged from the United States dollar in May — added to the “recent strains” in the digital asset market suggested “structural fragilities.” President’s Working Group on Financial Markets report from November 2021, where officials said legislation was “urgently needed” to address financial risks.
The Fed report said, “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,” adding, “These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins.”
The report came in advance of Fed chair Jerome Powell’s testimony before the Senate Banking Committee, which is set to begin on June 22. In written remarks for a research conference sponsored by the Federal Reserve Board on Friday, Powell noted that a central bank digital currency could “potentially help maintain the dollar’s international standing.”
Following the UST crash — where stablecoin depegged from the dollar and later contributed to the Terra ecosystem forking — Treasury Secretary Janet Yellen called for a “consistent federal framework” on stable coins by the end of 2022, pointing to “risks to financial stability.” A congressional research agency later reported that the stablecoin industry was not “adequately regulated” at the time of the Terra crash.
Fundamentally operating as the central bank of the United States, the policy at the Fed has the potential to significantly affect the crypto space, including the possible rollout of a digital dollar. On Wednesday, the Fed announced it would raise interest rates by 75 basis points – the biggest increase in 28 years – to combat inflation.
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