Stablecoins, these cryptos whose value is indexed to currencies like the dollar, are experiencing massive adoption. But their rapid growth is not without risks. By serving as a bridge between the volatile crypto ecosystem and traditional finance, these stable tokens are of concern to 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. With part of the dollar reserves supposed to guarantee its value being blocked there, USDC experienced its own crisis of confidence. This episode illustrates the dangers associated with these tokens backed by traditional currencies.
While they offer crypto investors a convenient way to temporarily take refuge in a stable value, stablecoins rely on a fragile balance. Their reserves of cash or Treasury bills are subject to the vagaries of the traditional banking system.
However, the volumes involved continue to grow, boosted by investors’ enthusiasm for cryptocurrencies. The risk of a devastating domino effect in the event of failure increases. The US Treasury Secretary recently sounded the alarm on dollar-indexed stablecoins.
Towards reinforced crypto regulation?
This growing interdependence between crypto and traditional positions stablecoins at the heart of the concerns of regulators like the FED. Their incipient legal framework contrasts with volumes increasing tenfold in just a few years.
At the end of 2021, the capitalization of stablecoins approached $150 billion. That’s a multiplication by almost 10 in two years. This frantic 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 requirements for reservations and transparency. The objective: to guarantee the solidity of these tokens backed by the traditional financial system in order to limit the risk of contagion.
With the growing popularity of crypto, stablecoins are poised to become mainstream. But their interconnection with traditional finance raises new challenges for regulators like the FED. Their rapid growth in a relative legal vacuum calls for strengthening of safeguards to avoid a crisis with systemic repercussions. The perilous balance of stablecoins will undoubtedly be at the heart of the authorities’ concerns in the years to come.
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