Why do crypto Stablecoins worry the Fed?

Stablecoins, those cryptocurrencies whose value is pegged to currencies like the dollar, are experiencing massive adoption. However, their rapid growth is not without risks. Serving as a bridge between the volatile crypto ecosystem and traditional finance, these stable tokens are a concern for the FED. Their growing interdependence with the traditional financial system raises fears that a failure could lead to devastating effects.

The Systemic Risk of Stablecoins

Recently, the collapse of Silicon Valley Bank weakened one of the main stablecoins, USDC. A part of the dollar reserves meant to guarantee its value was blocked there, leading to a crisis of confidence for USDC. This incident highlights the dangers associated with these tokens backed by traditional currencies.

While they offer crypto investors a convenient way to temporarily take shelter in a stable value, stablecoins rest on a fragile balance. Their cash or Treasury bond reserves are subject to the vagaries of the traditional banking system. 

And yet the stakes continue to grow, fueled by investor enthusiasm for cryptocurrencies. The risk of a devastating domino effect in the event of failure increases. The U.S. Treasury Secretary has recently sounded the alarm about dollar-pegged stablecoins.

Towards Enhanced Crypto Regulation?

This increasing interdependence between crypto and traditional positions stablecoins at the heart of regulators’ concerns, such as the FED. Their nascent legal framework contrasts with volumes that have increased tenfold in just a few years.

By the end of 2021, the market capitalization of stablecoins was close to $150 billion. That’s almost a tenfold increase in two years. This breakneck pace worries the FED, especially since some, like Tether, are reluctant to fully audit their reserves. 

The central bank seems determined to strengthen its control over this still opaque universe. It could impose stricter reserve and transparency requirements. The goal: to ensure the strength of these tokens tied to the traditional financial system in order to limit the risk of contagion.

With the growing popularity of crypto, stablecoins are set to become indispensable. But their interconnection with traditional finance raises unprecedented challenges for regulators like the FED. Their rapid surge in a relative legal vacuum calls for a reinforcement of safeguards to avoid a crisis with systemic repercussions. The precarious balance of stablecoins will undoubtedly be at the center of authorities’ concerns in the coming years.