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The US Federal Reserve is closely monitoring cryptocurrencies, with stablecoins being one of the key focus areas. US politicians are pushing for companies issuing stablecoins to be regulated by a unit created by the Fed. Additionally, assets such as USDC and USDT, which are pegged to the US dollar, may be more important than previously believed for the future of the reserve currency.
Fed’s Cryptocurrency Report
The report published today by the Boston and New York Feds focuses on stablecoins. The main concern highlighted in the report is the potential of stablecoins to cause financial instability. Experts note similarities between money market funds and stablecoins, raising concerns about the risk potential of stablecoins for the financial system.
The report’s title, “Are Stablecoins New Money Market Funds?”, draws attention to the similarities between investor behavior during stablecoin transactions in 2022 and 2023 and investor behavior during money market fund transactions in 2008 and 2020.
“Our findings indicate that stablecoins are vulnerable to runs during periods of widespread cryptocurrency market turmoil and unique stress events. If stablecoins continue to grow and become more interconnected with key financial markets such as short-term funding markets, they could trigger financial instability in the broader financial system.â€
Are Stablecoins Safe?
According to the report, not really. The $0.99 range for stablecoins has been visited multiple times, indicating a threshold for breaking away from the fixed $1 value. Many stablecoins have been unable to recover once they cross this threshold. Researchers define this as the “breaking point” of money. This breaking point can lead to irreversible losses during periods when investors panic and flee.
In a recent statement, the Italian banking authority claimed that the 2022 Terra Luna crash proved that stablecoins are not stable assets. The report also mentioned Italy’s proposal to establish an international regulatory institution to regulate stablecoins and other cryptocurrencies.
However, there are various subcategories of stablecoins, such as algorithmic stablecoins, fully collateralized stablecoins, and overcollateralized stablecoins. Therefore, the comments from Italy resemble initial impressions of white-collar individuals who are not well-versed in the market.
