Thursday, July 25, 2024

Federal Reserve Banks in the United States Warn That Stablecoins Might Introduce Economic Instability.

The Federal Reserve Banks of Boston and New York have jointly released a data-focused study examining the potential influence of stablecoins on the wider economic framework.

Stablecoins are compared to some established financial instruments in the 49-page research “Runs and Flights to Safety: Are Stablecoins the New Money Market?” particularly money market funds (MMFs).

The thorough analysis also emphasized how stablecoins and MMFs, which engage in liquidity transformation, offer investors money-like assets because of their stable nominal value.

However, releasing constant liquidity could make them susceptible to runs, just like traditional bank deposits.

A case study of stablecoin runs, concentrating on instances using USDT and USDC in 2022 and 2023, is also included in the report. It compares and contrasts these incidents with the runs that money market funds went through in 2008 and 2020.

According to the investigation research, stablecoins are vulnerable when market downturns or unforeseen problems occur.

Stablecoins may endanger the entire financial system if they get more closely entwined with crucial financial markets like short-term funding.

Other significant findings show that stablecoins display a wider range of risk profiles than MMFs.

The paper also noted that while some stablecoins rely on safer collateral, such as cash and U.S. Treasury bonds, others depend on riskier assets, such as other cryptocurrencies or even corporate debt.

Stablecoins that are backed by depreciating collateral are more likely to depart from their peg and cause a large loss.

Furthermore, stablecoins that keep their pegs through algorithms based on supply and demand are not exempt from similar dangers and may face runs if investor confidence declines.

The data-based presentation also highlighted upsetting incidents that have already resulted in billions of dollars’ worth of losses.

The demise of Terra in May 2022 and the connection between USDC and the now-liquidated Silicon Valley Bank (SVB) are two noteworthy mentions.

The propensity of investors to sell stablecoin assets when their value falls from $1 to $0.99 is another important observation. The asset completely depreciates and falls for remaining investors when investors hurry to get out.

Similar to stablecoins, MMFs have a threshold of $0.995 and are normally valued at $1. Investors look for safer alternatives when the market price drops below this level, which causes a reduction to occur automatically.

Stablecoin Safe Haven Status in a Thread

Beginning in 2023, there were indications of a broader market recovery. The Securities and Exchange Commission (SEC) of the United States has, however, increased ambiguity.

Due to the alleged trading of unregistered securities and confusing documentation of the “securities” and “commodities” classifications for assets, top exchanges like Binance and Coinbase have been hit with lawsuits.

Investors no longer believe stablecoins to be helpful at hedging inflation and mitigating losses during market turbulence.

A new CCData analysis states that following an 18-month lull that affected most asset sectors, the stablecoin sector’s overall market cap was $124 billion in July, a decline of 11.6%.

This fall was caused by a number of things, including Binance. US fiat deposits were suspended as a result of legal action brought by the SEC, and MakerDAO decided to delist USDP because it was unable to bring in further money.

Additionally, by June 30, 2024, the global exchange Binance plans to delist all stablecoins in Europe.

Investors may look into different options if unfavorable developments in the stablecoin industry persist. This could result in the total collapse of a once-thriving market.

Cryptured Team
Cryptured Team
The writers team at is composed of passionate and experienced journalists who cover the latest developments in the crypto and blockchain space. They aim to provide accurate, unbiased and easy-to-understand news and information for their readers, as well as insights and analysis from industry experts. The writers team is always on the lookout for new and exciting stories that can help the general public learn more about the potential and challenges of these technologies.

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