The U.S. Federal Reserve is issuing another warning about stablecoins amid the current crypto market crash.
In a monetary policy report sent to Congress, the Fed’s Board of Governors say recent strains in the crypto market have “highlighted the structural fragilities” of stablecoins and other digital assets.
The Fed also argues that stablecoins present a risk to the financial system overall.
“The collapse in the value of certain stablecoins and recent strains experienced in markets for other digital assets demonstrate the fragility of such structures. More 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 Fed also says the lack of transparency regarding the riskiness and backing of stablecoins exacerbates their potential risk.
“In addition, the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”
Last month, algorithmic stablecoin TerraUSD (UST) lost its peg to the US dollar and collapsed along with its affiliated crypto asset Terra (LUNA), wiping out $40 billion in crypto market capitalization.
Don't Miss a Beat – Subscribe to get email alerts delivered directly to your inboxFeatured Image: Shutterstock/okeykat/INelson