It has become widely understood that the US is not exactly against cryptocurrencies, but they have their suspicions. It means that there probably won’t be an outright ban in the future, but the regulation of them could stifle innovation.
This is an instance that has been arising more and more frequently, with Facebook’s Libra cryptocurrency project, a prime example. The idea of a Libra stablecoin has been harshly criticized, and often on unfounded grounds, but the US Fed has released more information as to its concerns.
There was a strong belief that if cryptocurrencies adopted a stablecoin notion, and were tied to a stable currency, the lack of volatility would make them more amenable to regulators as it would be more a case of tokenizing actual currency.
However, this comes with its own set of problems, which the Fed has cottoned onto, and it has also led to the regulators releasing their concerns in the November edition of its semiannual “Financial Stability Report.”
In this report, the notion of stablecoins was again tackled, and the concerns with them outlined. The issues mentioned were also tied back to Facebook and its Libra currency, with special mention being paid as to how widely adopted the stablecoin could become.
Essentially, the biggest concern surrounding the Feds view on stablecoins is that if something goes wrong with them, be it in relation to operations, liquidity, or credit – “This loss of confidence could lead to a run,” the report said.
“In an extreme scenario, holders may be unable to liquidate, with potentially severe consequences for domestic or international economic activity, asset prices, or financial stability,” it added.
More concerning to the Fed, and possibly why it has been giving Facebook such a hard time, is their views on a stablecoin that could be widely adopted. If Facebook is backing its currency 1:1, and it is widely adopted, and loss in confidence could force a massive shake out.
If there are billions of dollars tied up in Libra tokens across the globe, and a bank run is initiated, the consequences could be dire to the financial markets.
“Stablecoin initiatives that are built on existing large and cross-border customer networks, such as Facebook’s Libra, have the potential to rapidly achieve widespread adoption,” the report said, which also coincided with comments made by Fed Governor Lael Brainard last month.