Top US Financial Regulators Warn Against Perils of Stablecoins
The Financial Stability Oversight Council (FSOC), which was set up in 2008 to combat risks to the financial sector after the financial crisis, believes stablecoins could cause potential problems if they gained wider use.
“If a stablecoin became widely adopted as a means of payment or store of value, disruptions to the stablecoin system could affect the wider economy,” the regulators stated in its financial report for 2019. “Financial regulators should review existing and planned digital asset arrangements and their risks, as appropriate.”
The panel added in the report: “The council recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and distributed ledger technologies.”
The FSOC also evoked Bitcoin and other cryptocurrencies, and acknowledged that trading data “was sparse and may be unreliable.” The panel is also unconvinced that distributed ledger technology could lead to the economic boon may major corporations claim it could.
“The ultimate success of the technology, including applications in the financial sector, is not yet certain,” the report stated. “Some early efforts have not resulted in the anticipated efficiency gains and other promised benefits, and as a result, have been scaled back, refocused, or abandoned.”
United States Secretary of the Treasury Steven Mnuchin heads the FSOC panel, and its voting members include Jay Clayton, the chairman of the Securities and Exchange Commission, as well as Heath Tarbert, the new chairman of the Commodity Futures Trading Commission.
The report also highlighted “risks to consumers, investors and businesses associated with potential losses or instability in market prices” as well as “illicit financial risks; risks to national security; cybersecurity and privacy risks; and risks to international monetary and payment system integrity.”
Last month, the U.S. Federal Reserve warned that increasing use of cryptocurrencies known as “stablecoins” lacked safeguards and regulations, and could promote crimes such as money laundering and terrorism financing.
The warnings, published as part of a November Financial Stability Report, warned of financial crimes made possible be stablecoins. The value of a stablecoin are determined by underlying assets or basket of assets, including the U.S. dollars, euros, and even gold.
“The possibility for a stablecoin payment network to quickly achieve global scale introduces important challenges and risks related to financial stability, monetary policy, safeguards against money laundering and terrorist financing, and consumer and investor protection,” the report states.
Stablecoin initiatives out of Facebook and China, which the Federal Reserve calls “global stablecoins”, could be adopted in the mainstream, but problem could arise.
“The inability to convert stablecoins into domestic currency on demand or to settle payments on time could create credit and liquidity dislocations in the economy,” the Federal Reserve report warns. “If a stablecoin’s credit, liquidity, market and operational risks are managed ineffectively, it could face a loss of confidence. This loss of confidence could lead to a run, where many holders attempt to liquidate their stablecoins at the same time.”
The report adds: “The anonymity often found in stablecoins could be used to obscure financial transparency and facilitate money laundering, terrorist financing, and other financial crimes. Financial institutions are subject to customer due diligence and other anti-money-laundering regulations intended to help detect and disrupt illicit activity. Addressing such vulnerabilities is critical for any stablecoin.”