Digital assets such as cryptocurrencies could become a threat to global financial stability due to their “scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system”, a leading international body has warned.
The Financial Stability Board (FSB) published a report warning of the risks of crypto-assets to financial stability. It focused on “unbacked” crypto-assets, stablecoins and decentralized finance and crypto-asset trading platforms.
The FSB identified vulnerabilities including liquidity mismatches and credit and operational risks, which it said made stablecoins susceptible to sudden and disruptive runs on their reserves. Such events could spill over into short-term funding markets, it said. The report also cited the opacity and lack of regulatory oversight of the crypto-asset sector as an issue.
Meanwhile, CFA Institute also raised similar concerns in a letter to Treasury Secretary Janet Yellen earlier this month. The organization’s Systematic Risk Council urged regulatory action against the growing risks unregulated stablecoins pose to US financial stability.
Citing delays in the legislative process, CFA Institute urged policymakers to pursue other methods of regulation, including designating the use of stablecoins as systematically important payment, clearing and settlement activities.
The institute also asked members of the Treasury Department’s Financial Stability Oversight Council to use their authority to regulate stablecoins, with an immediate concern being to limit the use of fractional reserve stablecoins.
Elsewhere, Federal Reserve governor Lael Brainard also highlighted the need to address risks related to stablecoins.
“It is important we prepare for the financial system of the future and not limit our thinking to the financial system of today,” Brainard said in a speech at the US Monetary Policy Forum in New York on February 18.
She continued: “It is also important to address settlement risk, whereby funds settlement is not certain and final when expected, and systemic risk, whereby the failure or distress of a stablecoin provider could adversely affect the broader financial system.”
Brainard – nominee for vice chair of the Fed – announced that the bank was considering a potential US central bank digital currency, or ‘digital dollar’. Such an asset could preserve some of the “safe and effective elements” of the present financial system while complementing private sector innovations transforming the financial landscape, she said.
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