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Factbox-Five Reasons U.S. Regulators Think Stablecoins Threaten The Financial System

Reuters

Last Updated: November 02, 2021, 03:36 IST

Factbox-Five Reasons U.S. Regulators Think Stablecoins Threaten The Financial System

A group of U.S. regulators on Monday called for Congress to regulate issuers of "stablecoins" like banks, arguing in a report that this emerging class of digital asset could pose a risk to the broader financial system.

A group of U.S. regulators on Monday called for Congress to regulate issuers of “stablecoins” like banks, arguing in a report that this emerging class of digital asset could pose a risk to the broader financial system.
Stablecoins are a type of digital asset pegged to traditional currencies, with a relatively small market value of around $127 billion. Here is why regulators think they threaten the system:
RUN RISKS
Currently, stablecoins are mostly used to facilitate trading, lending or borrowing of other digital assets, generally on or via digital asset trading platforms.
But across the market, stablecoins have a range of policies governing such issues as disclosures, what assets are held in reserve to back the coins, redemption rights and operational controls. That could make them susceptible to a loss of investor confidence, particularly in times of market stress, the report said.
Once a stablecoin run had begun, it could create a “self-reinforcing cycle of redemptions and fire sales of reserve assets” which could spill over to other parts of the system.
PAYMENTS
Stablecoins could become widely used by households and businesses to make payments, the report said.
Payment stablecoins face many of the same basic risks as traditional payment systems, which are highly regulated. Those include: credit risk, liquidity risk, operational risk, risks arising from poor system governance, and settlement risk, the regulators wrote on Monday.
“When not managed comprehensively, these risks can make payment systems less available and less reliable for users, and they can create financial shocks or operate as a channel through which financial shocks spread,” it said.
SYSTEMIC RISK
While the value of stablecoins is still relatively small, the incredible growth of the market – 500% over the past 12 months – has policymakers rattled. The potential for an individual stablecoin to scale rapidly raises the prospect that it, or an associated wallet operator, could start to pose a systemic risk if they were to fall into distress – much like some of the country’s largest banks.
ECONOMIC POWER
A hugely popular stablecoin issuer or wallet provider could wield huge economic power, the report said. “A stablecoin that becomes widely adopted as a means of payment could present concerns about anti-competitive effects, for example, if users of that stablecoin face undue frictions or costs in the event they choose to switch to other payment products or services.”
MARKET ABUSE, MANIPULATION
Unregulated digital asset trading platforms present a litany of risks, the report warned, including: fraud, misuse of inside information, and manipulative trading activities; market disruption due to an operational failure; and money laundering and terrorist financing.

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first published:November 02, 2021, 03:36 IST
last updated:November 02, 2021, 03:36 IST