The United States Federal Reserve (Fed) once again expresses its concerns about the risks posed by stablecoins. This time he has added a warning that the risk of sudden and desperate redemptions of stablecoins is similar to the risk of capital flight from money market funds.
In itself, the Fed believes that stablecoins have many growth prospects, but while this sector is growing rapidly, “there are still risks”, since the assets used to link them may lose value, causing insufficient liquidity.
Stablecoins are tokens issued on the blockchain whose value is linked to an external asset to guarantee a 1:1 exchange. For this reason, they function as digital representations of the dollar, the euro and even gold, as described by the CriptoNoticias educational academy.
In its report on the financial stability of the United States, the government agency adds that stablecoin vulnerabilities may be exacerbated by lack of transparency in terms of the risk and liquidity of the assets used to give them that so-called stability.
The increasing use of stablecoins to meet margin requirements for leveraged trading in other cryptocurrencies may increase volatility in demand for stablecoins and increase redemption risks.
Financial stability report issued by the Fed.
The report does not mention any specific stablecoin, but rather refers to the sector in general, which remains highly concentrated among three of these projects.
The three largest stablecoins by market capitalization are USDT from Tether, USDC from Circle and BUSD from Binance and Paxos. Together they represent more than 80% of the total market value.
Stablecoins under the spotlight of regulators
While the warning was issued by the institution that serves as the Central Bank of the United States, Terra stablecoin lost its peg to the dollar falling below $0.85.
The fall began last weekend, which forced the Luna Foundation Guard (LFG), the entity behind Terra, to take action, as reported by CriptoNoticias.
The Terra case once again puts the focus on these types of projects, although they have been under strong legal scrutiny for some time.
In September of last year, the Securities and Exchange Commission (SEC) and the United States Department of the Treasury considered taking steps to limit the growth of Tether (USDT) and other stablecoins.
Just as the Fed says now, back then its motive is that they consider this type of cryptoactive as a systemic risk for the dollar and the US economy.
Other concerns also tend to revolve around stablecoins, as it is the case that they are not entirely backed in dollars. In fact, Circle, the issuing company of the USDC currency, acknowledged this last August, when it reported that apart from the fact that it is not fully backed by dollars deposited in a bank, its reserves do not cover the total number of coins in circulation.
Janet Yellen talks about Terra USD and calls for a regulatory framework for stablecoins
The Secretary of the Treasury of the United States, Janet Yellensaid today that the decoupling of Terra USD (UST), in its 1:1 relationship with the dollar, shows the urgency of having a regulatory framework for stablecoinswhich aims to minimize the volatility seen in most cryptocurrency markets.
A stablecoin known as Terra experienced a bull run and its value decreased. I think that just illustrates that this is a fast growing product and there are risks to financial stability and we need a framework that is appropriate.
Yellen during her testimony before the Senate Banking and Housing Committee.
In this way, Yellen responded to a question addressed to her by Senator Pat Toomey, the main Republican on the Banking Committee, about the urgency of approving a regulatory framework for the stablecoin sector.
In this regard, the Secretary of the Treasury said it would be “very appropriate” to pass legislation this yearconsidering that stablecoins do not respond to “consistent” standards as a new payment system.