Ideas sound great on paper, a stablecoin backed by Bitcoin is an awesome idea. And of course, the smart and educated team marketing the idea to the public are also pretty convincing. But, every now and then, one of these ideas fail. Every now and then, awful ideas with poor execution backed by top-notch marketing ventures annihilate people’s investments overnight. Worse yet, they mess up so much that all regulators rush to regulate the hell out of the sector. On well, stablecoin regulations were certain, but now, stablecoin regulations are reigning down upon crypto at hypersonic speeds. Federal Reserve, the one and only, is now charging up for a legislative attack on stablecoins. And clearly, the FED has got everything they need to impose harsh and paralyzing stablecoin regulations.
Stablecoin Regulations Coming in Hot!
The U.S. Federal Reserve has not been a fan of stablecoins or cryptocurrencies in general. However, following Terra USD (UST) crash, they are voicing their concern regarding the volatility. As for their bright and clever solutions, they are pushing government backed digital assets as the “better” alternative.
As part of an extensive report on financial stability in numerous sectors, the Fed reports on Stablecoins. While identifying the associated risks, they mention how private stablecoins fail to peg their currency to the value of the US dollar.
Primarily, the Fed cites lose liquidity for digital assets and blockchain projects as a strong risk factor.
“Structural vulnerabilities persist at money market funds and some other mutual funds, and the rapidly growing stablecoin sector is vulnerable to runs.
Stablecoins typically aim to be convertible, at par, to dollars, but they are backed by assets that may lose value or become illiquid during stress; hence, they face redemption risks similar to those of prime and tax-exempt MMFs [money market funds].
These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins.
Additionally, the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility in demand for stablecoins and heighten redemption risks.”
Terra USD (UST) Down
This week, Terra USD (UST), a stablecoin backed by Bitcoin lost its peg to the US dollar. It fell as low as $0.68. Subsequently, the Luna Foundation Guard (LFG) responsible for UST came up with a quick response, the non-profit organization supporting the Terra (LUNA) ecosystem rapidly allocated $1.5 billion in assets to recover the price. Since then, UST has crawled back up to $0.90. In the meantime, stakeholders are pulling out their assets out of fear, making it difficult to stabilize the value.
In the report, Federal Reserve discusses the issue by calling out the risks involved. With that, they offer central bank digital currencies (CBDC) as an alternative operating within a regulated framework.
“A CBDC has the potential to support financial stability. In a rapidly digitizing economy, the proliferation of new types of digital money, including stablecoins, could present risks to both individual users and the financial system as a whole.
A CBDC could provide the public with broad access to digital money that is free from credit and liquidity risk.”
Arguably, the Terra USD (UST) is a blessing in disguise for the Fed. They get a golden chance to say “I told you so” and impose stablecoin regulations. Then, they get to move forward with an oppressive CBDC program.