Amid the ongoing crypto market meltdown, the Federal Reserve board of governors has turned their focus to stablecoins. According to them, stablecoins pose the greatest risk to the financial sector as the crypto market correction rages on.
The crypto industry is currently in a rough patch as prices of digital assets plunge alongside the global economy. Moreover, the beginning of the current situation is triggered by the collapse of the Terra ecosystem.
Since then, the crypto market has failed to stabilize, leading to investors losing billions of dollars worth of assets.
Stablecoins’ Collapse is Due to Structural Fragilities
The monetary policy report of the board of governors released on Friday analyzed the collapse of some stablecoins. According to the report, the Terra UST stablecoin meltdown last month, coupled with the fluctuations in the digital asset market, points to the “structural fragilities” of cryptocurrency.
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Accordingly, the government agency referred to the November 2021 President’s Working Group on Financial Markets report to further shed light. The report indicates that officials call for urgent legislation to address the financial risks associated with cryptocurrency.
The Fed report pointed out that stablecoins are not protected by liquid assets and are subject to the regulatory standard. As a result, this exposes investors to risks, and the broader economy becomes susceptible to unfriendly factors.
Furthermore, these vulnerabilities may be worsened by the absence of transparency about the high risk and liquidity of assets pegged with stablecoins.
The report came days before the scheduled testimony of Fed Chairman Jerome Powell before the Senate banking committee on June 22.
Commenting on the proposed central bank digital currency (CBDC), Powell noted that the CBDC would help strengthen the dollar’s value in the international financial sector. Powell made this remark while speaking at a conference backed by the Federal Reserve Board on the international role of the USD.
Treasury Secretary Calls for Stablecoin Regulations
The fall of the Terra UST, which led to its de-pegging from the dollar, and the subsequent collapse of the Terra ecosystem shocked the crypto industry. Secretary Janet Yellen has called for federal regulations to prevent a similar event from happening to other stablecoins.
Yellen wants robust federal guidelines to manage the circulation of stablecoins throughout the year. This is to forestall any event that could impact financial stability in the United States.
Similarly, research published by the U.S. Congress later revealed that authorities did not properly regulate the stablecoin space before the Terra crash.
Essentially, the Federal Reserve is the central bank of the U.S., and its policies can impact the crypto industry positively or negatively. The proposed rollout of the digital dollar is one thing that could hinder the growth and expansion of digital assets in the United States.
The Fed announced another Increase in the interest rates by 75%, effectively making it the highest in 28 years. The recent hike came amid high inflation as the Fed attempts to put things under control.