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Will stablecoins threaten financial stability?

Will stablecoins threaten financial stability?

With cryptocurrencies and exchanges facing court cases and possible strict regulation, regulators are starting to worry far more about stablecoins, and whether they can negatively impact on the existing financial system. 

The cryptocurrency space is awash with negative comments from figureheads of the traditional financial system, whether that be from bank officials or leading lawmakers and influential figures from the SEC and the Treasury. 

However, what appears to be most vexing the top officials in the US financial system are the $120 billion in stablecoins, circulating throughout crypto, and used as a peg against fiat currencies such as the US dollar, the euro, pound sterling etc. 

According to an article on Bloomberg, officials are worried about the potential impact of stablecoins. 

"They’re also worried that widespread, fire-sale runs on crypto assets could threaten financial stability and that certain stablecoins could scale up dangerously fast." 

The article tells of the possible launch of a formal review of stablecoins. This could be launched by the Financial Stability Oversight Council, which could lead to far-reaching regulation for stablecoins. 

One worry is that stablecoins are being used for transactions that are quite similar to those taking place in the traditional banking industry, with the difference that they are paying markedly better returns to investors.  

For example, most bank saving accounts would only offer the investor less than a 1% interest return. In crypto, this return can vary from around 10% up to around 20% on certain platforms. The protocols being used are entirely removing the middle men, who are prevalent across the whole of the banking sector. 

A main argument put forward by regulatory officials is that consumers do not receive the same level of protections. Notwithstanding, many consumers appear more than willing to take this risk in order to beat the miserly bank interest rates. 

Stablecoins in the crypto sector are not the only headache to be concerning treasury officials. The Facebook-backed Diem stablecoin is due to be rolled out later this year, regulatory approval permitting. This would permit Facebook users and those of partner platforms to buy crypto and other products with the Diem coin. 

Statements such as “the wild west of crypto” and a new kind of “shadow banking” are being put out by the likes of Gary Gensler, chair of the SEC. But when it comes down to it, US officialdom is going to have to tread a tightrope in order to attempt to please the banking industry as well as a relatively new industry full of innovative financial products. 

The banking sector does not serve retail customers well. In fact, it serves them very, very badly. Things need to change. Will Gensler and co carry out their mandate to protect the interests of the investor, or will they succumb to pressure from the banks?  

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice. 

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