The Board of Governors of the U.S. Federal Reserve System have issued their monthly Financial Stability Report. This special report is dedicated to the profits and risks of "global stablecoins".
Stablecoins: Global System with So Many "Ifs"
First, the Federal Reserve admits to the numerous advantages that stablecoins present as a concept. It has been highlighed that stablecoins are "faster, cheaper, and more inclusive payments could complement existing payment systems". This is in comparison to cases where traditional financial institutions are sophisticated and poorly accessible. Stablecoins can also be managed to eliminate the volatility of cryptocurrencies, which is one of the borders for them to be utilized as the medium for exchange.
Therefore, the "global stablecoin initiatives" like Facebook's Libra can rapidly achieve cross-border adoption. However, the major threat for stablecoins is apparent - the "inability to convert in national currency". The loss of confidence in "pegging" the stablecoin to traditional assets can lead to a run, in which several holders will attempt to liquidate their stablecoins at the same time.
This dramatic scenario may be caused by "poor design and governance", and can result in severe consequences for international economic activity, asset prices, and financial stability.
The Federal Reserve also outlined in its report that in many cases, stablecoins can be utilized for money laundering, terrorist financing, and other financial crimes. Therefore, the Federal Reserve would require operators of such systems to conduct their Due Diligence, as well as Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures to avoid any abuse. Moreover, the problems of disclosure policy and protecting investor data should be of paramount importance for stablecoin issuers:
Disclosures should clearly detail consumer and investor rights and protections, including whether the holder of the stablecoin has any rights to the underlying asset. Issuers should be transparent on how the stablecoin is tied to the underlying asset, has been said in the Report.
Last but not least, the report highlighted that the Federal Reserve, together with the Group of Seven, will closely monitor stablecoin developments as well as all the risks associated with it.
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