FED says that the financial system could face “severe consequences” if a broad-based stablecoin is poorly designed or regulated.
The U.S. Federal Reserve (FED) recently assured that stablecoins are potential risks to the traditional financial system. The bank issued that comment after its inform of financial stability.
However, the institution said that overall financial stability conditions had changed little since its last report in May, and that “the core of the financial sector appears resilient”.
Stablecoins are cryptocurrencies designed to minimize the volatility of this digital coins’ price. But some governments and institutions like FED don’t approve the use of these assets.
According to the Federal Reserve, high levels of corporate debt, the impact of an extended period of low global interest rates, and emerging “stablecoin” proposals could generate “risks”.
In its report, the Federal Reserve highlighted the use of potentially volatile short-term funding posing only a modest risk to financial institutions. Especially, FED is worried about those companies that record-high levels of corporate debt. It says that low global borrowing could make an insurance company, and pension funds to take more risks.
It also considers that new financial technologies such as stablecoins (cryptoassets supported by fiat money or other “stable” assets like precious metals), and the crypto currency network proposed by Facebook could cause problems.
“The current combination of very low credit spreads and high levels of indebtedness among risky nonfinancial corporates, including through leveraged loans, merits heightened vigilance. Over the medium term, the low-for-long environment and the associated incentives to reach for yield and take on additional debt could increase financial vulnerabilities”, FED Governor, Lael Brainard, said.
The official added that “looking farther ahead, the emergence of a stablecoin network with global reach could pose important risks to financial stability”.
Stablecoins Would Need Regulation
FED said that stablecoins need constant surveillance. “Innovations that foster faster, cheaper, and more inclusive payments could complement existing payment systems and improve consumer welfare if appropriately designed and regulated”, the inform explains.
The financial institution commented that a global or broad-based stablecoin could generate “severe consequences” in the financial system if it is “poorly” designed and unregulated.
“The possibility for a stablecoin payment network to quickly achieve global scale introduces important challenges and risks related to financial stability, monetary policy, safeguards against money laundering and terrorist financing, and consumer and investor protection”.
For that reason, FED asks Facebook (which plans to launch its cryptoactive in 2020) to avoid volatility from cryptocurrencies by trying them to an underlying basket of assets.
The Federal Reserve is taking an increasing interest in digital currencies. It is looking for a manager dedicated to research about that topic. Whilst, China is studying to launch its state-backed digital currency.
Besides, a former advisor to US President Donald Trump revealed, last month, he plans to issue his stablecoin, which is not fully backed by reserves.
US lawmakers also have studied to vet existing stablecoin offerings, especially market leader Tether (USDT), which currently faces a multibillion-dollar lawsuit that Bitcoin (BTC) figures have dismissed.
So far, however, low borrowing costs have made debt sustainable, but FED calls on to regulate stablecoins, as well as cryptocurrencies, to avoid any type of future risk. That is its final consideration or advice for the community.
By María Rodríguez