The Federal Reserve Board has released its twice-yearly monetary policy report, noting that “recent strains experienced in markets for stablecoins…and other digital assets have highlighted the structural fragilities in that rapidly growing sector.”
The report is a preview of Fed Chair Jerome Powell’s testimony in Congress next week. Powell is expected to outline the Fed’s plans to combat inflation. This week, Powell announced a 75-basis point rise in short-term interest rates, the largest increase in 28 years.
The report, which is submitted to the President of the Senate and the Speaker of the House of Representatives, elaborated on how “generally, stablecoins that are not backed by safe and sufficiently liquid assets and are not subject to appropriate regulatory standards create risks to investors and potentially to the financial system, including susceptibility to potentially destabilizing runs.”
The TerraUSD stablecoin collapsed in dramatic fashion last month, functionally losing all of its value. The report pointed to the “concentrated nature” of the stablecoin sector in which Tether, USD Coin and Binance USD constituted more than 80 percent of the total market value, growing rapidly over the past year to more than $180 billion in March 2022.
According to the report, “these vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins.”
The report added that the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency have all made recommendations to address prudential risks posed by stablecoins.
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