Fed Flags Risks of Stablecoins to Financial Stability

Stablecoins add ‘new vulnerabilities’ to the cryptocurrency market and financial stability more broadly. This conclusion is contained in a study ФРБ of New York.

The document cites growing risks of mass conversion of ‘stablecoins’ such as USDC into fiat currency amid rapid growth of the DeFi sector.

The flip side is equally true — forced sales of US Treasuries could weaken collateral for stablecoins. In particular, these safe assets have recently shown notable volatility.

Experts highlighted the situation of a $7 billion drop in USDT’s market capitalization in the wake of the Terra collapse. Some of the funds ended up in USDC ($4 billion), they noted.

“The case raises serious concerns — stablecoins could amplify liquidity risks for riskier rivals due to the psychological comfort they provide in periods of turbulence”, — wrote the analysts.

Analysts pointed to ‘negative feedback loops’ arising from the tight integration of ‘stablecoins’ with DeFi protocols.

“Stablecoins are considered the safest asset in the industry. Problems with them pose the greatest systemic risk,” — the document states.

Experts proposed granting regulators “the authority to implement standards that promote functional interoperability between ‘stablecoins’.” As an example of implementing the latter, they cited the use of bridges, which at the same time can become a “channel for transmitting market stress” and a target for cyberattacks.

Analysts also proposed enacting legislation that would require stablecoin issuers to limit affiliation with commercial entities.

“Congress may also consider additional standards for custodial-wallet providers, such as […] the use of users’ transaction data”, — says the report.

U.S. lawmakers are considering a bill to establish oversight of ‘stablecoins’.

Earlier, the Fed described the DeFi sector as a potential threat to financial stability.

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