Fed Officials Call for “Close Monitoring” of Stablecoins

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Federal Reserve officials reiterated their concerns regarding stablecoins and the need to monitor them closely at the latest Federal Open Market Committee meeting, according to the minutes of the meeting.

See: With More Money Pouring Into Stablecoin Than Municipal Bond Funds, Should You Invest?Find: Is Crypto Too Risky? 12 Experts Weigh In

Stablecoins are cryptocurrencies intended to remain stable and have low volatility. They can be pegged to a currency or a commodity, such as gold.

According to the minutes, Fed officials said that “significant structural vulnerabilities remained at entities such as prime money funds, and new financial arrangements such as stablecoins appeared to have the same structural maturity and liquidity transformation vulnerabilities but with less transparency and an underdeveloped regulatory framework.”

Some participants cited various potential risks to financial stability, including the risks associated with expanded use of cryptocurrencies or the risks associated with collateral liquidity at central counterparties during episodes of market stress. In connection with the former set of risks, a few participants “highlighted the fragility and the general lack of transparency associated with stablecoins, the importance of monitoring them closely and the need to develop an appropriate regulatory framework to address any risks to financial stability associated with such products,” according to the minutes.  

See: A Week Later, Investors Remain Unfazed by DeFi’s Largest Crypto HackFind: What Is Tether (USDT)? Should You Invest and Where to Buy?

“The Fed is rightly concerned about the severe vulnerability presented by stablecoins,” Eric Schiffer, CEO of The Patriarch Organization, told GOBankingRates. “Without the right regulatory visibility and oversight, there is a massive risk of eventual capital loss with few safeguards preventing a potential crypto Armageddon for investors.”

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This echoed Federal Reserve Chairman Jerome Powell’s statement last month, which called for a stronger regulatory framework for stablecoins.

“We have a tradition in this country where the public’s money is held in what is supposed to be a very safe asset. We have a pretty strong regulatory framework for bank deposits, for example, or money market funds,” Powell said, according to MarketWatch at the time. “That doesn’t exist for stablecoins, and if they’re going to be a significant part of the payments universe … then we need an appropriate framework, which frankly we don’t have.”

See: Powell Calls for Stronger Regulatory Framework Around StablecoinsFind: Crypto Firm Circle to Go Public in Deal Valued at $4.5 Billion

Powell also said at the time that the Fed will release a whitepaper on digital currencies in September in order to begin a major public conversation and lay out the potential benefits and also the potential risks of a central bank digital currency.

We have seen … wild fluctuations in the price of these crypto currencies and various celebrities and influencers can cause massive swings in price of even the biggest cryptocurrencies with simple tweets or off-the-cuff jokes and comments. Stablecoins, of course, are designed to limit these fluctuations, but they also come with multiple other issues, including serious concerns about transparency,” Bryan Slusarchuk, CEO of Fosterville South, told GOBankingRates. “When peeling away the marketing spin and rhetoric behind all of these currencies, it seems like at their core they are all trying to replicate attributes of a currency already in existence. The only currency, of course, that has been a store of value, a hedge against uncertainty and truly money for thousands of years, is gold.”

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See: Is the Fed Ready for Its Own Digital Currency?Find: Mark Cuban Owns Less Than $500 in Dogecoin Despite Team’s Stake in the Crypto

Earlier this week, Minneapolis Federal Reserve President Neel Kashkari, speaking at the Pacific Northwest Economic Regional Annual Summit in Big Sky, Mont., also voiced concerns about cryptos, saying, “cryptocurrency is 95% fraud, hype, noise and confusion,” according to MarketWatch.  

“We generally agree with Neel Kashkari, as cryptocurrency is not practical as a medium of exchange, and if it were to get traction as a currency, the Fed would ban it as not legal,” Jay Hatfield, CEO and portfolio manager for Infrastructure Capital Advisors, told GOBankingRates.

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