In Brief:
- FSOC released an annual report on risks associated with cryptocurrency adoption
- FSOC expressed that the adoption of stablecoins may pose risks to the financial stability.
- It is also concerned about the recent advances in Decentralized Finance.
The United States Financial Stability Oversight Council (FSOC), expressed concern about the adoption of stablecoins and other digital assets in an annual report released on Friday.
Consumer confidence in stablecoins could be harmed by factors like illiquidity, a lack of proper safeguards, opacity surrounding redemption rights, and cyber assaults, according to the FSOC.
As per the FSOC report, “a run on stablecoins during strained market conditions may have the potential to amplify a shock to the economy and the financial system.”
Although it was just on Dec. 16th when Chairman of the Federal Reserve of the United States, Jerome Powell expressed that he does not see cryptocurrency as a threat to financial stability. Stablecoins, according to Powell, will undoubtedly play a role in the future if properly regulated.
The report also raised concerns about recent advances in decentralised finance, or DeFi, in which the use of high leverage could result in a fire sale if the price of the underlying asset decreases.
This would cause a cascade of margin calls and price drops. In addition, the report stated: “users of these services face the risk of loss due to market value fluctuations, operational issues and cybersecurity threats, among other risks.”
According to the report’s recommendations, the FSOC advises that federal and state authorities collaborate to enact legislation on stablecoins and digital currencies.
Despite reservations about the crypto industry’s lack of regulation, the report emphasized the industry’s inventive potential.
It said, “the development of digital assets and the use of associated distributed ledger technology may present the opportunity to promote innovation and further modernization of financial infrastructure. Regulatory attention and coordination are critically important in light of the quickly evolving market for digital assets.”
Comments on stablecoins were part of a bigger discussion about digital assets and other risks in the report.
The countries around the world are analyzing the risks associated with stablecoins and crypto. Just last month the US Treasury Department released a study on the risks associated with trading stablecoins. As per the report the risks associated with stablecoins are numerous.
