U.S. Federal Reserve Says Stablecoins Might Aid Financial Stability

The U.S. Federal Reserve published its latest Financial Stability Report and its assessment of stablecoins is surprisingly positive.

Stablecoins as a class include dollar-pegged cryptocurrencies like Tether, which are backed by traditional assets. Though the Reserve doesn’t drop names, it is mainly concerned with stablecoins that have global relevance.

The report is surprisingly optimistic: it suggests that stablecoins could provide a “new medium of exchange,” a complement to existing payment systems, and a solution to crypto price volatility. But although the Federal Reserve admits that stablecoins have potential, it warns that stablecoins could have unintended consequences.

The report emphasizes the importance of design. It notes that a poorly designed global stablecoin network “could pose risks to financial stability.” Without effective redemption, settlement, and risk management, stablecoins could lead to a “loss of confidence” and mass liquidation, which could harm economic activity in various ways.

On top of this, the report notes that stablecoin issuers, operators, and intermediaries must comply with regulations. These groups must prevent money laundering, terrorism, and other criminal activity through their policies. They must also protect consumers against fraud and ensure that consumers know their holding rights, among other things.

Moreover, the Reserve says that it is working with other regulators to ensure that up-and-coming stablecoins address core legal and regulatory challenges. It adds that a G7 Working Group on Stablecoins expressed similar goals. That said, these concerns only apply to global stablecoins — they presumably exclude minor coins.

Though the Federal Reserve hasn’t endorsed or disavowed any stablecoins, some coins clearly face more challenges than others. For instance, Tether found itself at the center of a lawsuit from the New York Attorney General’s office in April (and a more recent class action suit). Another coin, Basis, shut down due to regulatory issues in 2018.

The Federal Reserve briefly mentions Facebook’s Libra coin in a positive light, noting that it is one stablecoin with “the potential to rapidly achieve adoption.” However, this might not mean much, as U.S. Congress has been hard on Libra during hearings. Those hearings also led Congress to introduce a bill that would regulate stablecoins as securities. 

Perhaps other stablecoins will fare better. Some plans seem promising: JPM Coin is being built by one of the world’s biggest financial institutions and TrueUSD is focusing on regulatory compliance. However, it’s too soon to say whether the Federal Reserve and other government bodies will warm up to stablecoins ― now or ever.

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