The Federal Reserve Semi-Annual Report; Stablecoins Could Cause a Financial Crisis

    US Federal Reserve Board's Financial Stability Report highlights the issues around stablecoin cryptocurrencies and the impact they could have on the global economy.

    The U.S Federal Reserve released its half-year Financial Stability report last week; stablecoins were among the highlights with the Fed terming them as potentially disastrous to the economy. They, however, proposed steps that can be taken to avert a financial crisis attributed to the likes of Libra in new FinTech space.

    According to the report, the worst-case scenario for existing stablecoins would be a run by HODLers in the crypto market. Ideally, firms offering the stable digital assets would have to liquidate and return the fiat staked funds; a probability of default is what the Fed fears!

    The design for stablecoins is preferred by conservative crypto investors and a number of projects like Tether are slowly gaining traction. Stablecoins are pegged to fiat currency and some of the recent proposals are suggesting gold as a stake for digital assets. Alternatively, a basket of currencies can be pegged to digital assets to contain the volatile nature of cryptocurrencies.

    However, the Fed is still not comfortable with the stablecoin ecosystem. The regulator was of the opinion that these ventures also contain a higher than normal degree of risk. It, therefore, follows that a crisis in liquidity, operations or the credit aspect of stablecoins would be fatal to an integrated economy. In addition, the investor's loss of confidence might pressure the firms into a run; The report stated,

    “In an extreme scenario, holders may be unable to [liquidate], with potentially severe consequences for domestic or international economic activity, asset prices, or financial stability.”

    Facebook’s Libra and Fed Guidelines

    The report noted that existing networks such as Facebook’s social media platform were the foundations of stablecoin initiatives. Given their popularity, they stand a chance of being adopted at a faster rate than most of us would expect. According to the report, this might be harmful and a number of leaders in the U.S and Europe have come out to oppose the Libra digital currency.

    This report, however, concludes with some guidance on how the stablecoin catastrophe can be contained. The Fed noted that issuers must disclose all terms of service and strive to protect integrity through KYC and efficient data practices. Furthermore, the G20 had earlier stated that projects like Libra should be halted until all regulatory concerns are addressed.

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    Lujan Odera
    Lujan Odera
    Lujan is a blockchain technology and cryptocurrency author and editor. He has worked in the field of cryptocurrencies and blockchain technology since 2015 helping him gain enough experience to be the writer he is today. He is known for his simple writing style that allows novices to understand the field in the simplest way.

    [Alert] Use the author's self-conducted information at your own risk, do you own research, never invest more than you are willing to lose.

    [Disclosure] The published news and content on BitcoinExchangeGuide should never be used or taken as financial investment advice. Understand trading cryptocurrencies is a very high-risk activity which can result in significant losses. Editorial Policy \\ Investment Disclaimer


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