The US central bank has warned of growing risks in the stablecoin sector.
In its half-yearly Financial Stability report, released yesterday, the Federal Reserve said that stablecoins pose a growing threat to payment and financial systems.
Stablecoins are digital assets that are issued and transferred using cryptocurrency networks (blockchains).
They aim to maintain a stable market value relative to a national currency or other reference assets.
The largest dollar stablecoin, tether, now has $74.3bn in assets, up over $3bn in the last week alone.
Stablecoins have grown fivefold in value in the last year, the Federal Reserve said.
The Fed’s warning follows a similar statement from the US Department of the Treasury.
A week ago, the Treasury said it was recommending that US legislators should force stablecoin issuers to be insured depository institutions, like banks.
In its Financial Stability report, the US central bank said the risks posed by stablecoins were similar to those of money market funds (MMFs) and certain types of mutual fund, such as those holding potentially illiquid debt.
Last year, during the coronavirus crisis, the Fed intervened to backstop dollar money market funds and corporate bond ETFs.
“These stablecoins have structural vulnerabilities and are susceptible to runs”
Yesterday, the US central bank cited a similar potential liquidity mismatch in the stablecoin sector.
“Certain stablecoins, including the largest ones, promise to be redeemable at any time at a stable value in US dollars but are, in part, backed by assets that may lose value or become illiquid,” the Fed said in its report.
“If the assets backing a stablecoin fall in value, the issuer may not be able to meet redemptions at the promised stable value,” the Fed went on.
“Accordingly, these stablecoins have structural vulnerabilities similar to those discussed earlier for certain MMFs and are susceptible to runs.”
“These vulnerabilities may be exacerbated by a lack of transparency and governance standards regarding the assets backing stablecoins,” the US central bank said.
Tether has so far refused to disclose its holdings in full, although it provides a quarterly breakdown of its reserves by asset type.
Approximately half of tether’s $63bn assets as at the end of June 2021, the latest disclosure date, were in commercial paper and certificates of deposit. Both these asset classes represent the unsecured debt of corporations.
In an October article, journalists at Bloomberg alleged that tether had billions of dollars of unsecured short-term loans to large Chinese companies, as well as billions of secured dollar loans to cryptocurrency exchanges, backed by bitcoin as collateral.
Circle, the second-largest dollar stablecoin, with $34bn in assets, said in August it was shifting its reserves into cash and short-term US government bonds, foregoing riskier investments. However, Circle also refuses to disclose its holdings by line item.
Most money market funds, by contrast, offer full daily disclosure of their individual portfolio holdings.
According to a recent survey of financial market participants by Fed staff, cryptocurrencies and stablecoins were seen as the fifth most likely source of a market-wide shock over the next 12-18 months, up from ninth most likely in the previous survey, conducted six months ago.
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