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New Fed Report Ranks Stablecoin “Threat” as Similar to U.S.-China Tensions and Climate Change

In its latest Financial Stability Report published Monday, the U.S. Federal Reserve ranked cryptocurrencies and stablecoins among its top risks to U.S. financial stability over the next 12-to-18 months.

Fed risk matrix ranks cryptos and stablecoins just behind U.S.-China tensions

The Fed report is printed twice a year, once in the spring and again in the fall, and its current edition includes this chart below from Page 67, that rates crypto/stablecoins as the fifth most serious risk to financial stability – tucked between U.S.-China tensions and climate issues.

Why are stablecoins such a threat?

The report section regarding stablecoins described them as digital assets that are issued and traded on blockchains, which are “purported” to be pegged to a stable off-chain asset such as gold, fiat currencies, or government bonds. The report also noted that the value of stablecoins has exponentially grown fivefold during the past 12 months to $130 billion as of October 2021. 

Here are the main reasons for concern cited in the Fed’s publication:

  • The largest stablecoins by market cap promise to be redeemable at any time at a stable value in U.S. dollars, but each token is not necessarily backed 1:1 with a fiat equivalent. Instead, some stablecoins are backed by commercial bonds, which may lose value or become illiquid. If those assets lose value, issuers may not be able to meet redemption demands.  
  • Stablecoins have structural weaknesses similar to certain money market funds, that make them susceptible to liquidation runs by investors who could drain their accounts all at once. 
  • The report states that these shortcomings could be magnified by a lack of transparency and governance standards regarding some of the assets backing stablecoins. 
  • Lastly, the potential use of stablecoins in payments and their capacity to grow can also pose risks to payment and financial systems.

Whether the specific stablecoin threats are real or overblown FUD, they were real enough for members of the Fed to include in this report. However, it could be argued convincingly that all four bullet points cited as stablecoin vulnerabilities could also apply to most fiat currencies, including the U.S. dollar. That’s especially true when considered within the context of the government’s fiscal and monetary policies over the past several years. 

On The Flipside

  • As stated 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 as threatening to U.S. financial stability as U.S.-China tensions and global warming.

Why You Should Care?

The government sees stablecoins as a threat to its sovereignty. Their opposition to stablecoins is a good indicator that stablecoins are a good idea for us.

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    This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

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    Author

    Tor Constantino is a former journalist, consultant and current corporate comms executive with an MBA degree and 25+ years of experience - writing about cryptocurrencies and blockchain since 2017. His writing has appeared across the web on Entrepreneur, Forbes, Fortune, CEOWorld and Yahoo!. Tor's views are his own and do not reflect those of his current employer.