On Friday, the Federal Reserve released its bi-yearly monetary policy report and noted ‘structural fragilities’ in the Stablecoin Market.
The report stated that recent strains experienced in markets for stablecoins, which are digital assets maintaining a stable value relative to a national currency or other reference assets and other crypto assets ‘have highlighted the structural fragilities in that rapidly growing sector’.
The report called the stablecoin sector ‘highly concentrated’, with the three largest stablecoin issuers being — Tether, USD Coin, and Binance USD.
The report further explained that the aggregate value of stablecoin has grown over the past few years. However, the recent collapse in the value of certain stablecoins and also the strains witnessed in crypto markets indicate the ‘fragility’ of such structures.
Additionally, the stablecoins that are neither backed by safe and sufficiently liquid assets nor regulated, pose risks to both investors and the financial system. These stablecoin also remain susceptible to destabilizing.
These susceptibilities may be aggravated by insufficient transparencies related to risks and liquidity of stablecoin-supporting assets.
Moreover, the growing use of stablecoins to meet margin needs for levered trading in other cryptos can cause volatile demands for stablecoins. This can further escalate redemption risks.
The report is a preview of Fed Chair Jerome Powell’s testimony in Congress next week. Powell is expected to give an overview of the Fed’s plans to tackle inflation.
The Federal Reserve also raised interest rates by 0.75% which is the largest in 28 years. This eventually led to a fluctuation in Bitcoin.
To address prudential risks raised by stablecoin, the President’s Working Group on Financial Markets, the Fed Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have made some recommendations.
Also Read: USDC’s Circle Launches Euro-Backed Stablecoin ‘EUROC’
