As the stablecoins market cap surpassed $ 100 billion in May, regulators are increasingly concerned about the risks they pose.
Stablecoins are generally considered to be much more secure than regular cryptocurrencies. This is because they usually have a fixed price because they are backed by physical assets. However, their growing use worries regulators about the risks they pose. This concern extends not only to investors, but also to the stability of the financial system. Lev Menand, research fellow at Columbia Law School, Highlighted this point in his testimony before a Senate banking subcommittee last week.
Additionally, although stablecoins are frequently backed by the U.S. dollar, many never pass through the U.S. banking system. It has also raised concerns about their potential use for illicit purposes, such as money laundering.
Some administration officials are concerned that many stablecoin investors fundamentally do not understand the asset. For example, consumers may not know that money held in stable coins is not protected by the Federal Deposit Insurance Corp. This means that they could potentially lose money on a stable coin without any recourse.
US Senator Elizabeth Warren compared stablecoins to “wild notes,” poorly capitalized banks issued in the Old West in the 19th century. Warren added that if the Federal Reserve issues its own digital currency (CBDC), consumers could get stable benefits without risk.
The Fed’s approach
Fed Chairman Jerome Powell echoed this sentiment in a address last month. Powell acknowledged that “the potential of stablecoins is to improve the efficiency of payments, speed up settlement flows and reduce costs for the end user.” Despite this, they still lack proper protection, he added. Program CBDC could use these advantages, while providing adequate protection.
Following the remarks, Fed Governor Lael Brainard warned that the increased use of stablecoins could fragment the financial system. This could potentially increase costs for American households and businesses. Other Fed officials have also warned that if consumers lose faith in privately issued stablecoins after they have become widely used, it could lead to a sort of panic ‘on the bank’, threatening stability. financial.
Meanwhile, the Federal Reserve Bank of Boston plans to release research and open source code later this year, demonstrating technology that could support a digital dollar. During his remarks, Powell said lawmakers and the public should weigh in to move the project forward. However, this process could take years.