The Future of Stablecoins—Anything But Stable?
Stablecoin currencies such as Facebook’s Libra may pose systemic risks to the global financial system, according to a recently released Federal Reserve Report. In its Financial Stability Report released on November 19, 2019, the Fed states that a global stablecoin network, if poorly designed and unregulated, could pose risks to financial stability and that the failure of a stablecoin currency to operate as expected could disrupt other parts of the financial system.
These concerns are not surprising in light of the regulatory scrutiny focused on virtual currency developments starting with the advent of Bitcoin. That being said, “stablecoins” are, as the name suggests, intended to avoid the risky fluctuations in currency value associated with Bitcoin and other traditional cryptocurrencies by pegging the value of the stablecoin to an existing currency and backing the stablecoins with actual currency or other assets.
Nonethless, stablecoins share many of the same risks associated with other cryptocurrencies. In this regard, the Fed report warns that the anonymity often found in stablecoins can facilitate money laundering, terrorist financing and other financial crimes.
To address these risks, the Federal Reserve and other regulators are closely monitoring stablecoin currencies such as Libra to ensure that any stablecoin system with a global scope and scale satisfactorily addresses legal and regulatory challenges before they operate. In particular, regulators in many jurisdictions have made it clear that stablecoin issuers, operators, and intermediaries are responsible for preventing their systems from being used by criminals to obscure their identity, location, and transactional activity and for ensuring compliance with anti-money-laundering and counter-terrorist-financing laws and regulations in each jurisdiction in which they operate.”
The report also warns that, as with any other financial product, stablecoin currency platforms must contain adequate consumer and investor protections such as transparency as to fees, costs, and risks, as well as privacy protection and protection against fraudulent transactions.
The report comes months after Facebook proposed launching its Libra global cryptocurrency initiative, an initiative that has elicited significant concerns from lawmakers and regulators.