The collapse in the value of certain stablecoins and recent strains in the digital asset market suggest structural fragilities, says the Federal Reserve’s Monetary Policy Report. The Fed Reserve’s board of governors highlighted stablecoins as a “potential risk to financial stability”. They reiterated the urgent need for legislation to address financial risks.
The Fed report stated that stablecoins are not backed by safe and sufficiently liquid assets. They are not subject to appropriate regulatory standards, thus, creating risks to investors and potentially to the financial system – including susceptibility to destabilizing runs. The report said vulnerabilities may be aggravated by a lack of transparency regarding the riskiness and liquidity of assets backing the stablecoins.
Jerome Powell, Fed Reserve Chair, noted that a central bank digital currency (CBDC) could help maintain the dollar’s international standing. He said the Federal Reserve’s strong commitment to the price stability mandate contributes to the widespread confidence in the dollar as a store of value. Powell acknowledged that the wide use of the dollar globally can also pose financial stability challenges that can materially affect households, businesses and markets. As such, the Fed has been playing a significant role in promoting financial stability and supporting the use of dollars internationally through its liquidity facilities.
The chair highlighted that they are examining whether a US CBDC would improve on an already safe and efficient domestic payments system. The Fed has to think not just about the current state of the world, but also about how the global financial system might evolve over the next five to 10 years. Powell emphasized the importance of the dollar to the US and the global economies and financial markets.