Fed releases report on the risks and benefits of stablecoins

Fed released a report examining the threats and the impact of stablecoins on U.S. monetary policy and the credit system.

Researchers noted “the potential of a safe haven for stablecoins” during periods of turbulence in the crypto markets, and the risks that could arise from mass conversion into fiat.

Experts recommended conducting audits and establishing liquidity and reserve-quality requirements to mitigate risks. In justification, they noted a $41 million penalty on Tether Limited for inaccurate data on USDT collateral.

The document notes the impact of the growing popularity of stablecoins on the balance sheets of financial institutions and the interaction between banks and consumers.

A comparison is presented between the cash-tokenization option and full-reserve backing at the Fed with two-tier intermediation. In it, “stablecoins” are backed by deposits that issuers hold in commercial banks.

The first scenario “could provide the greatest stability, but at the expense of forgoing credit intermediation.” The second — capable of supporting both the issuance of stablecoins and preserving the banking system in its current form, with a smaller threat to financial stability in the United States, the experts emphasised.

A 100% cash-reserve banking system would guarantee the stability of the stablecoin peg. At the same time, such an approach could lead to deposit outflows from traditional financial institutions, with systemic risks.

This effect could be mitigated by limiting reserves of stablecoins and by introducing differentiated interest rates on collateral. In such a scenario, experts also did not rule out expanding the central bank’s balance sheet to meet demand from stablecoin issuers.

The Fed allowed the use of stablecoins not only in peer-to-peer payments and DeFi, but also in more inclusive payment systems and financial ecosystems.

On February 8 and 15, the House of Representatives and the Senate will consider the President’s Working Group on Financial Markets’ a report on stablecoins. Its authors recommended treating asset issuers as banks.

Among the participants of the first hearing were Circle CEO Jeremy Allaire, Coinbase Global CFO Alesia Haas, FTX CEO Sam Bankman-Fried, Bitfury CEO Brian Brooks.

During the Trump administration, Brooks led the OCC. Under his leadership the regulator allowed banks store collateral for stablecoins and keys to customers’ cryptocurrency wallets on behalf of clients. The agency also provided financial institutions with the ability to use public blockchains and stablecoins for settlements.

Earlier, the current head of the OCC Michael Hsu allowed greater trust in stablecoins with proper oversight. The regulator promised in 2022 to present additional recommendations concerning the integration of cryptocurrencies into banking product lines.

In January 2022, the FDIC-insured USDF Consortium announced plans to promote a “regulated” stablecoin.

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