Digital assets such as cryptocurrencies could become a threat to global financial stability due to their “the scale, structural vulnerabilities and growing interconnectedness with the traditional financial system”, a leading international body has warned.
The Financial Stability Board (FSB) has released a report warning of the risks of crypto-assets to financial stability. He focused on “unsupported” crypto-assets, stablecoins and decentralized platforms for funding and trading crypto-assets.
The FSB identified vulnerabilities, including liquidity mismatches and credit and operational risks, which it said made stablecoins vulnerable to sudden and disruptive runs on their reserves. Such events could ripple through short-term funding markets, he said. The report also cited the opacity and lack of regulatory oversight of the crypto-asset industry as a problem.
Meanwhile, the CFA Institute also raised similar concerns in a letter to Treasury Secretary Janet Yellen earlier this month. The organization’s Systematic Risk Council has called for regulatory action against the growing risks unregulated stablecoins pose to U.S. financial stability.
Citing delays in the legislative process, the CFA Institute urged policymakers to pursue other methods of regulation, including designating the use of stablecoins as consistently important payment, clearing, and settlement activities.
The institute also directed members of the Treasury Department’s Financial Stability Oversight Board 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 stressed the need to address stablecoin risks.
“It is important that we prepare for the financial system of the future and that we do not limit our thinking to the financial system of today,” Brainard said in a speech at the United States Monetary Policy Forum in New York on February 18.
She continued: “It is also important to address settlement risk, where settlement of funds is not certain and final when expected, and systemic risk, where the failure or distress of a stablecoin provider could have an effect negative on the broader financial system.”
Brainard – the Fed’s vice-presidential candidate – announced that the bank is considering a possible US central bank digital currency, or ‘digital dOllar’. Such an asset could preserve part of the “safe and effective elements” of the current financial system while complementing private sector innovations that are transforming the financial landscape, she said.
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