U.S. Federal Reserve’s latest Financial Stability Report, published Monday, ranked crypto-currencies and stablecoins in its top risk to U.S. Financial Stability over the next 12-to-18 month.

Fed Risk Matrix ranks cryptos, stablecoins second to U.S.-China tensions

The Fed report is printed twice a year, once in the spring and again in the fall, and its current edition includes this chart below from Page 67, that rates crypto/stablecoins as the fifth most serious risk to financial stability – tucked between U.S.-China tensions and climate issues.

What makes stablecoins so dangerous?

The report section regarding stablecoins described them as digital assets that are issued and traded on blockchains, which are “purported” to be pegged to a stable off-chain asset such as gold, fiat currencies, or government bonds. In addition, the report noted that stablecoins’ value has increased fivefold in the last 12 months to $130 Billion as of October 2021.

Here are the main reasons for concern cited in the Fed’s publication:

• Market cap-leading stablecoins promise that they can be redeemed at any moment at a fixed value in U.S. Dollars, although each token may not always have a fiat counterpart. Some stablecoins, however, are supported by commercial bonds that may lose or become inliquid. These assets may lose their value and issuers could not meet redemption demand.
• Stablecoins share structural weaknesses with certain money market fund funds. This makes them vulnerable to liquidation run by investors, who may drain all of their accounts at once.
• These shortcomings may be exacerbated by the lack of transparency regarding certain assets that support stablecoins.
• Last but not least, stablecoins’ potential use in payments as well their growth rate can pose potential risks for financial and payment systems.

The Fed members felt they had to be included in this report, regardless of whether the particular stablecoin threat is real or a bogus FUD. But, all the bullet points that are cited as stabilitycoin weaknesses could apply to any fiat currency, even the U.S. Dollar. That’s especially true when considered within the context of the government’s fiscal and monetary policies over the past several years.

To The Flipside

• You can also apply the criticisms and risks associated with unstablecoins to fiat currencies.
• It’s laughable that the Fed believes cryptocurrencies and stablecoins are as threatening to U.S. financial stability as U.S.-China tensions and global warming.

What are the reasons to care?

Stablecoins are seen by the government as a threat its sovereignty. The government’s opposition to stablecoins shows that they are not a good idea.

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