On November 8, the Federal Reserve published its latest financial stability report.
The report highlights a range of vulnerabilities in the financial sector, including a section on stablecoins, comparing their risks to money market funds.
Referencing a separate report from the President's Working Group released last week, the Fed's appraisal was that:
"Certain stablecoins, including the largest ones, promise to be redeemable at any time at a stable value in U.S. dollars but are, in part, backed by assets that may lose value or become illiquid. If the assets backing a stablecoin fall in value, the issuer may not be able to meet redemptions at the promised stable value."
Yesterday's report also featured two polls of industry participants, one conducted in the spring and one in the fall, asking them to name potential shocks to financial stability.
Source: Financial Stability Report, Federal Reserve, Nov. 2021
The spring poll found cryptocurrencies/stablecoins at ninth place, based on the number of citations from those market participants. By the fall, it had ascended to the fifth position, immediately above climate concerns.
The same timeframe also saw a rise in fears of U.S.-China tensions and threats to the Chinese property sector — propelled to the front page by Evergrande's debt crunch.
The issue of stablecoin backing has become a major bone of contention among U.S. regulators. The PWG report requested greater statutory authority from Congress, including a new requirement that stablecoin issuers be, effectively, banks. But that report also threatened action by the Financial Stability Oversight Council (FSOC), to designate stablecoins as systemically important payment, clearing, and settlement activities, which would open up the option for regulatory oversight.
The overlaps between the Fed, the PWG and FSOC voting members are growing. Fed Chair Jerome Powell sits on the PWG as well as FSOC, alongside Treasury Secretary Janet Yellen, herself a former Fed Chair. Acting Comptroller of the Currency Michael Hsu was also party to the PWG report and, prior to joining the OCC earlier this year, was also at the Federal Reserve.