Fed reiterates alert against stablecoins as Terra plummets

Federal Reserve Stablecoins
  • The United States Federal Reserve issued a warning about the risks associated with stablecoins.
  • The Fed noted that one of the risks of stablecoins may be like the risk of capital flight in fiat currency markets.
  • The recent Fed report was released on the same day that Terra’s stablecoin, UST, lost its peg to the dollar for the second time in three days.

In its most recent semi-annual report, the United States Federal Reserve (Fed) again warned about the risks associated with so-called stablecoins or tokens anchored to an underlying asset. Coincidentally, the publication of said report took place this Monday, May 9, the same day that UST (Terra USD) fell below 0.85 USD, a stablecoin supposedly pegged to the price of the US dollar in a 1:1 relationship.

In yesterday’s “Financial Stability Report” the Fed compared the risk of flashbacks from so-called stablecoins to the risk of market capital outflows from government currencies. Likewise, the government agency pointed out that there is a lack of transparency regarding the risks and liquidity of the assets that are used as backing for stablecoins.

The increasing use of stablecoins to meet margin requirements for leveraged trading in other cryptocurrencies may increase volatility in demand for stablecoins and increase redemption risks

United States Federal Reserve (Fed).

In this way, the Fed once again reiterated its position against the so-called stablecoins or stable currencies, alleging that they represent a threat to the presumed stability of the dollar financial system. Also, a senior Treasury official has joined the Fed’s view that stablecoins could experience significant and dangerous loss of customers, CoinDesk reported.

In the most recent semi-annual report, the Fed stated that more than 80% of the market capitalization is concentrated in three stablecoins: Tether’s USDT, Circle’s USDC and Binance’s BUSD.

t highlights that this Fed report was published on the same day that the Terra stablecoin (UST) lost its 1:1 parity with the US dollar, for the second time in just three days. The report does not mention the case of Terra or any other specific currency to warn about its risks but includes a general warning against all so-called “stable” currencies.