US Federal Reserve Banks say stablecoins may ‘become a source of financial instability’

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The Federal Reserve Banks of Boston and New York revealed a workers report on Sep. 26 evaluating stablecoins, reminiscent of USDT and USDC, to cash market funds. Key findings within the report embody the statement that stablecoins and cash market funds observe related patterns throughout runs and that stablecoins may inject instability into the broader monetary system.

The report, titled “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?” features a complete comparability of investor habits through the stablecoin runs of 2022 and 2023 to investor habits through the cash market fund runs of 2008 and 2020.

Per the publication:

“Our findings show that stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events. Should stablecoins continue to grow and become more interconnected with key financial markets, such as short-term funding markets, they could become a source of financial instability for the broader financial system.”

The researchers additionally notice that stablecoins seem to have a discrete “break-the-buck” threshold of $0.99, beneath which redemptions speed up and runs — durations during which buyers flee, doubtlessly inflicting an asset crash for remaining buyers.

A break-the-buck threshold in cash market funds happens when the online asset worth of a fund drops beneath a greenback, this will result in investor shares, valued at $1.00, to dip beneath market worth and trigger buyers to hunt secure harbor elsewhere.

Image credit score: Anadu, et. al., 2023

As Cointelegraph lately reported, Italy’s central financial institution can also be taking measures to establish contributing components and forestall stablecoin runs. In a current assertion, the Italian banking authority cited the 2022 Terra Luna collapse for example that stablecoins “have not proved stable at all.”

According to the report, Italy has additionally known as upon world lawmakers to type a world regulatory physique to control cryptocurrency, stablecoins, and associated applied sciences.

Related: ‘It’s going to worsen for banks’ — JPMorgan CEO on overregulation

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