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.