The Fed cites worries about stablecoin in its latest Financial Stability Report

The United States Federal Reserve Board released its semiannual Financial Stability Report on Monday. The report points to the volatility on commodities markets brought on by the Russian invasion of Ukraine, the spread of the omicron variant of COVID-19 and “higher and more persistent than expected” inflation as sources of instability.

Stablecoins and some types of money market funds were singled out in the report and noted to be prone to runs. According to the Fed, stablecoins have an aggregate value of $180 billion, with 80% of that amount represented by Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). They are backed by assets that may lose value or become illiquid during stress, leading to redemption risks, and those risks may be exacerbated by a lack of transparency, the central bank said.

Besides that, the increasing use of stablecoin in leveraged trading of other cryptocurrencies “may amplify volatility in demand for stablecoins and heighten redemption risks.”

The report reflects information as of April 25. Since the Federal Open Market Committee voted for an interest rate hike of 50 base points on May 4, some of the signaled instability has been manifested. Terra USD (UST) flipped Binance USD to become the third-largest stablecoin on April 18, then temporarily de-pegged from the dollar and dropped to $0.67 on Tuesday. The USDT/BTC margin lending ratio remained bullish, however.

Related story: The United States turns its attention to stablecoin regulation

The Fed report featured a boxed discussion of central bank digital currencies (CBDCs) that largely covered familiar ground. It reiterated the findings of the Fed’s January discussion paper that a U.S. digital dollar would best meet the country’s needs if it were privacy protected, identity verified, intermediated, and transferable. It went on to restate its neutral position on the issue of creating a U.S. CBDC.