The Fed cites stablecoin concerns in its latest Financial Stability Report

The United States Federal Reserve Board released its semi-annual Financial Stability Report on Monday. The report points to volatility in commodity markets caused by the Russian invasion of Ukraine, the spread of the Omicron variant of Covid and “higher and longer-than-expected” inflation as sources of instability.

Stablecoins and some types of money market funds were singled out in the report, calling them vulnerable to runs. According to the Fed, stablecoins are worth a total of $180 billion, with Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) accounting for 80% of that amount. They are backed by assets that can fall in value or become illiquid in times of stress, leading to repayment risks, and those risks can be exacerbated by a lack of transparency, the central bank said.

Additionally, the increasing use of stablecoins in leveraged trading of other cryptocurrencies “may increase the volatility of demand for stablecoins and increase redemption risks.”

The report reflects information from April 25. Since the Federal Open Market Committee voted to raise interest rates by 50 basis points on May 4th, some of the signaled instability has materialized. Terra USD (UST) flipped Binance USD on April 18 to become the third-largest stablecoin, then temporarily broke away from the dollar, falling to $0.67 on Tuesday. However, the USDT/BTC margin credit ratio remained bullish.

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The Fed report included a boxed discussion of central bank digital currencies that largely covered familiar territory. It reiterated the findings of the Fed’s January discussion paper that a digital US dollar would best serve the country’s needs if it was privacy-protecting, identity-verified, brokered and transferrable. It then reiterated its neutral position on the issue of creating a US CBDC.