US Federal Reserve Banks say stablecoins could ‘become a source of financial instability’

189
SHARES
1.5k
VIEWS

Related articles


The Federal Reserve Banks of Boston and New York published a employees report on Sept. 26 evaluating stablecoins, resembling Tether (USDT) and USD Coin (USDC), to cash market funds. Key findings within the report embrace the remark that stablecoins and cash market funds observe comparable patterns throughout runs and that stablecoins might inject instability into the broader monetary system.

The report, titled “Runs and Flights to Security: Are Stablecoins the New Cash Market Funds?,” features a complete comparability of investor habits through the stablecoin runs of 2022 and 2023 to investor habits through the cash market fund runs of 2008 and 2020.

Per the publication:

“Our findings present that stablecoins are weak to runs in periods of broad crypto market dislocation in addition to idiosyncratic stress occasions. Ought to stablecoins proceed to develop and change into extra interconnected with key monetary markets, resembling short-term funding markets, they may change into a supply of economic instability for the broader monetary system.”

The researchers additionally be aware that stablecoins seem to have a discrete “break-the-buck” threshold of $0.99, beneath which redemptions speed up and runs — durations by which buyers flee, probably inflicting an asset crash for remaining buyers.

A break-the-buck threshold in cash market funds happens when the online asset worth of a fund drops beneath a greenback, this may result in investor shares, valued at $1, to dip beneath market value and trigger buyers to hunt secure harbor elsewhere.

Picture credit score: Anadu, et. al., 2023

As Cointelegraph lately reported, Italy’s central bank is also taking measures to establish contributing components and forestall stablecoin runs. In a latest assertion, the Italian banking authority cited the 2022 Terra collapse for example that stablecoins “haven’t proved secure in any respect.”

Based on the report, Italy has additionally known as upon international lawmakers to kind a world regulatory physique to manipulate cryptocurrency, stablecoins and associated applied sciences.

Associated: ‘It’s going to get worse for banks’ — JPMorgan CEO on overregulation