New report ranks stablecoin threat just below COVID, US-China tensio,n and climate change dangers.
Report says stablecoins’ shortcomings can be magnified and stop them from being redeemable
Should crypto users be worried about using stablecoins?
In its latest 82-page Financial Stability Report published Monday, the US Federal Reserve ranked cryptocurrencies and stablecoins among its top risks to US financial stability over the next 12 to 18 months.
Why is the FED scared of stablecoins?
Not backed 1:1 by fiat
The biggest stablecoins are redeemable in USD, but not necessarily backed 1:1 with fiat, instead using commercial bonds which can depreciate or become very hard to sell. This means that stablecoin issuers could potentially not be able to help users redeem their stablecoins.
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.
Not transparent or standardized governance
The report states that these shortcomings could be magnified by a lack of transparency and governance standards regarding some of the assets backing stablecoins.
Growth in use can damage payment and financial systems
The Fed report notes that the value of stablecoins has increased 5x during the past 12 months to $130 billion as of October 2021. The potential use of stablecoins in payments and their capacity to grow can also pose risks to payment and financial systems.
Are stablecoins in danger?
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 the above “facts” pointed out as stablecoin vulnerabilities could also apply to most fiat currencies, including – you guessed it – the US Dollar, the supply of which the US government inflated by printing nearly 25% of all supply last year! This is why inflation is speeding up, according to this report.
It’s a bit distressing that the Fed believes cryptocurrencies and stablecoins are as threatening to US financial stability as a vaccine-resistant COVID variant, US-China tensions and global warming.
Once again, we have a myopic US report that buries its head in the sand when it comes to technology and anything that can threaten the status quo, ie. protecting the hegemony of the US Dollar. The US 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.
The fact that most stablecoins mimic the US Dollar, and are backed by it to a large extent, should actually help to protect the greenback as the world’s reserve currency, and not the other way around.
Creating friendly regulations that help to ensure that stablecoins use USD reserves and are accepted worldwide should actually be the US government’s top concern, instead of indulging itself in luddite buffoonery.
The FED development is a moderately bearish indicator that any responsible investor should keep in mind. The risk remains that authorities might do something wrong in haste. In any case, while collateralized stablecoins currently provide an amazing bridge between fiat currency and crypto assets, it’s likely that they will be phased out over the long term for algorithmic stablecoins like TerraUSD (UST), where you can currently earn great yield by staking .
Issuer Terraform Labs isn’t afraid to tackle regulations head on and recently pushed back at US intervention by suing the SEC. Be aware that UST’s peg can break in extremely volatile market conditions, therefore there is risk involved to consider when you buy.