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Stablecoins highlight “structural weaknesses” in the crypto industry



 In view of the current imbalance on the crypto market, the Governing Board of the American Federal Reserve points out that stablecoins pose great risks for investors and the entire financial system.


The Federal Reserve made the relevant statements in its new monetary policy report on Friday . In this context, the central bank argues that “the recent collapse of certain stablecoins” – very likely a reference to the crashed blockchain project Terra and its associated algorithmic stablecoin TerraUSD (UST) – in combination with the “current difficulties” of the crypto market indicate this that there are "structural weaknesses". In this regard, the authors refer to another government report from November 2021, which previously came to the conclusion that legal regulation is "urgently" needed to counteract the resulting financial risks.


"Stablecoins that are not backed by available and sufficient liquidity and do not meet appropriate regulatory standards pose risks for investors and potentially for the entire financial system, in part because they can create destabilizing bank runs," the central bank said in its new report . And further: "These vulnerabilities are compounded by a lack of transparency into the risk and liquidity of the assets to which the stablecoins are linked."


Stablecoins act as a kind of lubricant for the crypto industry, because the (value) stable cryptocurrencies help in many ways to organize the market and make it possible in the first place. This is made clear not least by the fact that the collapse of Terra triggered a chain reaction that is now putting the entire crypto market under massive pressure. The US central bank's criticism of stablecoins is therefore to be equated with a fundamental criticism of the crypto ecosystem.

The Federal Reserve's report comes a few days before its head Jerome Powell is to speak in the US Parliament on the possible introduction of an American central bank digital currency (CBDC) . Accordingly, this could also "help to maintain the international status of the dollar".

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