Stablecoins Could Cause Financial Instability, Federal Reserve Says

NEW YORK, N.Y. – According to the Federal Reserve, Stablecoins could bring a negative impact in terms of financial stability.

The central bank of the United States, Federal Reserve, is decrying the sentiment of a global stablecoin, while China, US’s eastern rival, is expected to set up a digital counterpart to the Chinese yuan.

Based on the recent Financial Stability Report earlier this month issued by the Board of Governors at the Federal Reserve, there was very little mention of the global stablecoins, despite it being a huge deal in the global macroeconomic game. The report stated that stablecoins are a kind of cryptocurrency, that can cause massive effects on the entire global economic system.

If stablecoins reached a global scale, it could result in massive challenges in just a short period of time, especially when it comes to monetary policy, protection for investors and consumers, safeguards against terrorist financing and money laundering, and overall financial stability, according to the report.

The report also highlighted that while stablecoins can become the latest medium of exchange, it can significantly affect financial stability if not designed and regulated properly.

It also stated price volatility as the key problem when it comes to cryptocurrencies, hence, using it as a payment medium has been prevented. The report also reasoned that stablecoins were first presented to answer to the volatility in cryptocurrencies by aiming to tie its value to a certain asset or group of assets like a set of sovereign currencies, the same thing Facebook’s Libra aims.

Libra was also mentioned in the report, calling the Facebook digital currency project as a kind of global stablecoin instead of a “private stablecoin” most people are calling it. The Fed also stated that Libra has enough potential to accomplish a widespread adoption rapidly.

Further, the Fed said that global stablecoins are unregulated, which could cause a massive disruption to the entire global financial ecosystem. It had also highlighted the lack of clarity when it comes to the stablecoin’s conversion to the fiat currency, stating that it could cause a possible liquidity lock.

The Fed has also put due importance on stablecoin’s attribute to anonymity, which adheres to the standard of terror financing, money laundering, and other crimes. Based on the report, the Fed has also left firm advice to investors to be sensible about the complexities when they invest in such forms of digital currency.

Lastly, the Federal Reserve said on the report that they, along with other regulators, are closely cooperating to keep a close eye on stablecoins and making sure it follows the legal and regulatory requirements before it can operate on a global scale.