The Federal Reserve provided new details today on its framework for supervising novel financial activities like cryptocurrencies and stablecoins at the banks it oversees. Stablecoins, a type of cryptocurrency typically pegged to the U.S. dollar, have become increasingly popular for facilitating trades, loans, and value transfers in crypto markets.
However, in updating its supervision approach, the Federal Reserve also warned that the growing use of stablecoins could “become a source of financial instability” for the broader financial system. The Fed said stablecoins, which now have a market cap of over $100 billion, could face runs and spike in volatility in times of stress.
JUST IN: 🇺🇸 Federal Reserve says stablecoins could become a source of financial instability for the broader financial system.
— Watcher.Guru (@WatcherGuru) September 26, 2023
As part of its novel activities supervision, the Fed clarified the process for banks to engage in certain stablecoin activities like storing reserves backing stablecoin issuance. But it also emphasized the risks associated with banks acting as issuers, dealers or custodians of stablecoins.
The Fed said its supervision program aims to balance financial innovation benefits with appropriate risk management. But its latest warnings suggest the central bank has growing concerns over potential stability risks from stablecoins going mainstream without proper oversight.
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