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FSB opens consultation about stablecoins’ vulnerabilities and risks to financial stability

Image by Christoph Scholz from Flickr

Thu, 16 Apr 2020, 01:56 am UTC

The Financial Stability Board (FSB) published a document about the regulatory, supervisory and oversight challenges of global stablecoins like Facebook's Libra.

In June 2019, G20 asked FSB to explore the regulatory issues about stablecoins. According to the G20 brief, FSB still doesn’t address the issues of monetary policy, monetary sovereignty, currency substitution, data privacy, competition, and taxation. But it explores the potential vulnerabilities of stablecoins and its risks to financial stability.

Risks to financial stability

Stablecoins may affect the emerging markets and developing economies (EMDE) because they have higher chances of becoming mainstream of value in these areas.

If a stablecoin is not stable, it will affect the spending decisions in EMDE’s and the operational disruptions it could cause will affect the economic activity. If financial institutions would get involved, then they would have to face the risk, themselves.

In terms of distress, a shift in global stablecoins from EMDE currency will impact the exchange rates and domestic bank funding. The risk depends on the stablecoin’s uses, how widely it is adopted, and the degree of connection within the banking system.

Stablecoin vulnerabilities

Stablecoins are vulnerable to a number of financial risks including market, liquidity and credit risks. For instance, could you still redeem it close to market prices if there was a massive redemption?

If market makers and resellers decide to withdraw from offering liquidity for stablecoin trading, it could have a knock-on effect on the users’ confidence and may prompt massive redemption.

Another concern with stablecoins is about its governance, operation and design. There could be technical defects in the ledger, issue with the custodian or a cyber incident.

Stablecoin will also be affected if the wallets where it is stored or the exchanges used to trade it have an incident. The impact will depend on the market share of the wallet or exchange and their operational resilience.

The FSB invites comments and the public consultation period will close on Wednesday, July 15, 2020. FSB will publish a final report in October 2020.

Meanwhile, Binance.US CEO Catherine Coley urges the U.S. government to use stablecoins for emergency payments because it is fast and safe. She also noted that doing so reduces the risk of spreading and contracting the virus.

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