U.S. Federal Reserve Concerned About Stablecoins Vulnerability

The U.S. Federal Reserve is expressing concerns about cryptocurrency stablecoins and brings forward more viable alternatives such as government backed assets.

In a recently issued report, the Fed discusses financial stability in a broader scope and identifies a number of risks associated with stablecoins.

Although stablecoins are advertised as being pegged to the US dollar, the report says:

“Structural vulnerabilities persist at money market funds and some other mutual funds, and the rapidly growing stablecoin sector is vulnerable to runs.

Stablecoins typically aim to be convertible, at par, to dollars, but they are backed by assets that may lose value or become illiquid during stress; hence, they face redemption risks similar to those of prime and tax-exempt MMFs (money market funds).

These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins.

Additionally, the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”

The Federal Reserve’s report also discussed central bank digital currencies (CBDC) and their role as alternative to stablecoins in a regulated framework:

“A CBDC has the potential to support financial stability. In a rapidly digitizing economy, the proliferation of new types of digital money, including stablecoins, could present risks to both individual users and the financial system as a whole.

A CBDC could provide the public with broad access to digital money that is free from credit and liquidity risk.”

Just yesterday, stablecoin TerraUSD (UST), caused a huge upshake in crypto markets with its coin intended to serve as a 1on1 peg to the US dollar, tanked to as low as $0.68.

Following the crash, The Luna Foundation Guard (LFG), a non-profit organization built to support the Terra (LUNA) ecosystem, had to allocate $1.5 billion in assets to shore up the price. Although it was able to recover to $0.90, it plummeted again to 0.7013 at time of writing according to CoinMarketCap, with global crypto investors panicking.

1/ Liquidity brawl behind the scenes amid material $UST peg deviation on third-party venues.

Fighting back. More updates are incoming #LUNAtics. Hang on, fam.

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— Terra (UST) Powered by LUNA (@terra_money) May 9, 2022