Can Stablecoins Affect Global Financial Stability?

November 16, 2019 12:07 PM UTC

According to the United States Federal Reserve, yes. The most recent Financial Stability Report talks about stablecoins and their impact on financial stability.

Stablecoins could become a new medium of exchange . . . but, if poorly designed and unregulated, could negatively affect financial stability.

The report states that only a poorly designed and unregulated global stablecoin network would be risky. According to the Federal Reserve, in a catastrophic event where the liquidity and market are managed incorrectly, the stablecoin would lose its reputation and trust and could lead to holders trying to liquidate all their stablecoins at the same time. In this scenario, many holders would simply be unable to do so which would have extreme consequences.

Given the array of risks and unaddressed issues to date, the Federal Reserve and other regulators are cooperating closely to ensure that any stablecoin system with global scale and scope must address a core set of legal and regulatory challenges before it can operate

Is This Bad or Good for Stablecoins?

Clearly, the report mentions all the risks associated with stablecoins, however, it specifically states that these are only risks if the stablecoin itself is not regulated and treated adequately.

no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined [in this report] are adequately addressed

This does basically seem to endorse Stablecoins as long as they are fully regulated and follow all the guidelines. It’s not an attack on stablecoins.

There has been an increasing interest in stablecoins lately. China, for instance, is preparing to launch its state-backed digital currency and a former advisor of Donald Trump said that he plans to launch his own stablecoin.

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