Stablecoins and Volatility: A Warning from Global Standard-Setters
Stablecoins adopted by multiple jurisdictions have caught the attention of global standard-setters, who have issued a warning about their potential impact on financial stability. According to a recent report, these stablecoins could transmit volatility more abruptly than other cryptocurrencies.
Targeted Restrictions to Prevent Capital Flight
The report highlights a particular concern regarding foreign currency-denominated stablecoins. If these stablecoins become easier and cheaper to hold in large quantities compared to foreign currency bank accounts, there is a risk of rapid capital flight or reversals. This could have serious consequences for the stability of financial systems.
The Risks of Stablecoins
While stablecoins can facilitate various transactions, they also come with distinct risks. These risks include the maintenance of a stable value and dependency on private issuers. The recent de-pegging incident of the algorithmic stablecoin terraUSD from the U.S. dollar serves as a real-time example of these risks. The de-pegging caused significant market losses amounting to billions of dollars.
Furthermore, the report emphasizes that global stablecoins adopted by multiple jurisdictions could pose even greater risks to financial stability. These stablecoins have the potential to cause significant volatility and instability within the financial system.
Hot Take
It is crucial for regulators and market participants to carefully assess the risks associated with stablecoins and implement targeted measures to mitigate potential threats to financial stability. While stablecoins offer benefits in terms of transaction efficiency, their impact on the stability of global financial systems should not be underestimated.
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