The Board of Governors at the Federal Reserve claimed that stablecoins are under potential risk of financial instability given the volatility of the crypto market
The US Federal Reserve System’s board of governors in its Monetary Policy Report stated that certain stablecoins are likely to see a collapse in their value. In the report released this Friday, Fed gave the reference to the fallen Terra network’s algorithm stablecoin UST that lost its parity with fiat currency, in its case US dollar last month that resulting in the collapse of the whole Terra (LUNA) network.
In the report, Fed also said that this came in addition to the significant drops and declines in the prices of digital assets, which is sufficient to consider that cryptocurrencies have structural fragilities. The Federal Reserves also pointed out the Financial Markets report of the President’s Working Group came in November 2021 where officials suggested that legislation urgently needed to figure out and address the financial risks.
In its report, Federal Reserves stated that those stable coins that are not backed by any safe asset like fiat currency, do not have enough liquid assets as well as those which do not fall under the appropriate regulatory standards, pose risks to investors, and eventually on the overall financial system. These vulnerabilities of stablecoins can get worse due to a lack of transparency about the risks and liquidity of assets behind the stablecoins.
A recent report came before the testimony of Federal Reserve chairperson Jerome Powell in front of the Senate Banking Committee scheduled on 22nd June. Powell wrote in the remark for the Federal Reserve Board-sponsored research conference on Friday that the central bank digital currency (CBDC) has the potential to help the dollar in order to maintain its international standards.
After witnessing the UST stablecoin crash, where the algorithmic stablecoin which is designed to peg its value with US dollar for unpegged from the dollar, this incident eventually resulted in the downfall of the Terra ecosystem. Janet Yelle, Treasury Secretary pointing out the risks to financial stability called out for a consistent federal framework focussing on stablecoins by this year’s end. Later, a congressional research agency also in its report stated that the industry of stablecoin does not fall under adequate regulation.
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