U.S. Federal Reserve Report Says Stablecoins Pose Financial Risks

A report from the Federal Reserve’s board of governors argues that stablecoins pose a risk to financial stability.

According to the report, the collapse of “certain stablecoins, plus the “recent strains” in the crypto industry, shows the “structural fragilities.”

“Stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors and potentially to the financial system, including susceptibility to potentially destabilizing runs. These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins,” the report reads.

The report rehashes a growing consensus amongst regulators that the crypto industry needs urgent regulation to prevent another Terra-like crash. Treasury Secretary Janet Yellen, while speaking with the Senate Banking committee, specifically mentioned that the Terra situation shows “that there are risks to financial stability and we need a framework that’s appropriate.”

Meanwhile, a previous report from The President’s Working Group on Financial Markets in November 2021 had urged the US Congress to “act promptly to ensure that payment stablecoins are subject to appropriate federal prudential oversight on a consistent and comprehensive basis.”

Tether’s dominance facing questions

Tether, a major stablecoin issuer, experienced a Bank run on the heels of the TerraUSD’s crash, as it had to honor roughly $10 billion in withdrawal within two weeks. 

This has played a role in its circulation supply declining by over 7% within the last 30 days. USDC, another major stablecoin, has experienced an increase of roughly 4%, according to data from CoinGecko.

A New York Times report identifies this growing fear in Tether, as it wrote that some crypto investors have begun placing their funds in other stablecoin options because they believe that another massive crash for the industry would test whether Tether has enough reserves.

However, Paolo Ardoino, Tether’s CTO, insists that all is well because the firm takes “risk management extremely seriously.”

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