In a recent report, the Federal Reserve Banks of Boston and New York expressed concern that stablecoins could potentially introduce instability into the broader financial system. This comes as no surprise as the ambiguity and lack of standard regulatory framework surrounding cryptocurrencies remain a pressing issue. According to the report, stablecoins, such as USDT and USDC, exhibit vulnerabilities similar to those exposed in traditional money market funds during runs.
During the unstable times of 2022 and 2023, the report indicates that there was a sharp resemblance in the behavior of investors fleeing from stablecoins and money market funds. The concern here is the potential “break-the-buck” threshold of stablecoins, currently marked at $0.99. Once this threshold is breached, the acceleration of redemptions leads to runs, posing a severe risk of an asset crash.
Coupled with the above findings, the report emphasizes that if stablecoins continue to grow and intertwine with the key financial markets, they could indeed become a source of significant financial instability.
Contrarily, the Central Bank of Italy is also stepping up its game to identify and prevent stablecoin runs. It cited the 2022 Terra Luna collapse, reinforcing that stablecoins have proven to be not so stable after all. A recent report mentioned Italy pressing for an international regulatory body to govern cryptocurrencies, stablecoins, and their related technologies.
There is grandeur in the concept of blockchain and crypto-based cross-border payments and ease of transactions no doubt, but risks persist. Enterprises like Bahrain’s Bank ABC and JPMorgan’s Onyx blockchain seem to have taken a leap towards the goal, offering a potentially more cost-effective and efficient solution for cross-border payments. A two-year-long experiment led to the launch of this blockchain-based payment service, which reportedly offers instantaneous and certain transaction execution between Bahrain and US corridors.
Evidently, along with the excitement of transitioning to a more digital form of finance, skepticism around this new investment avenue persists. Instability in the value of stablecoins, or the broader crypto market for that matter, alongside the lack of a standard regulatory mechanism, has potential investors questioning the reliability of these digital currencies. Indeed, with continual growth and potential disruptions promised by this blockchain revolution, the conventional financial system is poised for a thrilling ride ahead.
Source: Cointelegraph
