The Fed Releases Report Discussing Stablecoins and Previous Collapses

The Federal Reserve released their biannual Monetary Policy Report on Friday, where it briefly touched on the evolution of stablecoins and the challenges they face going forward. Next week, Chairman Jerome Powell will present the findings of the report to Congress. 

While the Monetary Policy Report is responsible for updating the U.S. Congress and the public on recent economic developments and its plan for monetary policy, they did mention the digital assets industry in the form of stablecoins. 

Firstly, the report acknowledged the growing field that is stablecoins, saying, “The aggregate value of stablecoins—digital assets that aim to maintain a stable value relative to a national currency or other reference assets—grew rapidly over the past year to more than $180 billion in March 2022.” 

It also mentioned the sector remains highly concentrated, with the three largest stablecoins, Tether, USD Coin and Binance USD taking up over 80% of the total market value. 

While the report specifically didn’t mention the collapse of UST, the Terra Network’s former prominent stablecoin that depegged from $1 and dropped significantly in the course of a few days last month, it did briefly mention the “collapse in the value of certain stablecoins and recent strains.” 

As a result, the Fed gave brief reasons for things to watch out for if you are an investor or a watchful eye. If a stablecoin is not backed by safe and sufficient liquid assets or if they are not subject to appropriate regulatory standards, the risk for these are extremely high. In addition, if a company is not transparent regarding the “riskiness and liquidity” of the assets backing the stablecoin, it might be something to stay away from. 

This statement is on par with previous statements from Treasury Secretary Janet Yellen, who has been skeptical of crypto and stablecoins. After the collapse of TerraUSD (UST), Yellen called for stablecoin regulation by the end of the year at a Senate banking hearing. 

The report concluded its section on stablecoins saying, “The President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have made recommendations to address prudential risks posed by stablecoins.” 

Other than stablecoins, the report went over a plethora of financial issues both domestic and abroad, including the current challenges the Russia-Ukraine conflict are presenting to the economy as a whole. 

Author: Tyler Irvin

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