Top Fed Official Sounds Alarm on Stablecoins: 'Could Pose a Risk to Financial Stability'

Top Fed Official Sounds Alarm on Stablecoins: 'Could Pose a Risk to Financial Stability'
A gold plated souvenir cryptocurrency Tether (USDT) coin arranged beside a screen displaying U.S. dollar notes in an illustration picture taken in London on May 8, 2022. (Justin Tallis/AFP via Getty Images)

Stablecoins are usually described as the remedy to the volatility of cryptocurrencies. However, Michael S. Barr, vice chair for Supervision for the U.S. Federal Reserve is worried they could “pose a risk to the financial stability” of the country.

Barr said it is important to get the regulatory framework right. “The President's Working Group report on stablecoins that came out about a year ago called upon Congress to take the necessary action to ensure that stablecoins, particularly those that serve as a means of payment, are subject to prudential regulation,” Barr said in his speech at D.C. Fintech Week.

He noted that crypto assets have proved to be very volatile and are unlikely to become a viable means to pay for transactions, adding that “stablecoins linked to the dollar are of particular interest to the Federal Reserve”.

While stablecoins such as Tether and USD Coin have recovered after getting de-pegged from the U.S. dollar, the Terra crash caused considerable apprehension about stablecoins. Major coins such as Bitcoin, Ethereum, and Dogecoin have been far more volatile, with a less than impressive performance so far this year.

Barr warned banks of the potential risks of crypto-related activities, suggesting crypto service providers be subject to similar regulations as traditional financial institutions.

He seemed to encourage banks to explore issuing tokens on distributed ledger networks, but “only in a controlled and limited manner.”

“The [Fed] is working with our colleagues at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to ensure that crypto-asset-related activities banks may become involved in are well regulated and supervised,” he said.

By Mehab Qureshi
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