The increasing use of stablecoins—cryptocurrencies which try to offer price stability by pegging their market value to a reserve asset—has triggered concerns at the Federal Reserve, with the central bank’s latest financial stability report warning that these digital assets are “prone 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,” the May 9 report said (pdf), referring to 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.”
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