Stablecoins could ‘negatively affect’ financial Stability: Federal Reserve

As countries around the world are increasingly moving toward a digital currency backed by their national fiat, the hub of financial and technological innovation of the past decades is moving in the opposite direction it would seem. The Federal Reserve, the central bank of the United States is decrying the idea of a ‘global stablecoin,’ while its eastern rival, China, is all set to launch a digital yuan.

In the “Financial Stability Report,” issued earlier this month by the Board of Governors at the Fed, global stablecoins, despite being the talk of the macroeconomic global game, found little mention. Stablecoins, the report stated are a form of “cryptocurrency,” that can have massive implications on the global economic ecosystem. If this expands to “global scale,” within a short period of time it could result in “important challenges,” in the realms of “financial stability, monetary policy, safeguards against money laundering and terrorist financing, and consumer and investor protection,” stated the report.

The report highlighted,

“Stablecoins could become a new medium of exchange but, if poorly designed and unregulated, could negatively affect financial stability.”

Volatility Control 

One of the “key problems,” with cryptocurrencies is “price volatility,” and hence its use as a payment instrument has been hindered. Hence, the report reasons, that stablecoins were introduced to “address this volatility by seeking to tie their value to an asset or a basket of assets.” One of the examples mentioned under the basket-backing is a “portfolio of sovereign currencies,” which is tabled by Libra, the Facebook digital currency project.

The Federal Reserve, right from the mouth of its Chairman, Jerome Powell, stated that Libra should halt development until concerns about monetary policy manipulation, financial instability and privacy were addressed.

Libra, now a mainstay in the intersection between cryptocurrency and central…

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