The Financial Stability Board published a five-page document on Monday warning of financial stability risks linked to the stablecoin market, which it said is valued at US$300 billion, with 99 percent of it pegged to the US dollar.
Run risk and the peg
The FSB said a run on stablecoins could force the sale of their reserves, pressuring the peg and affecting the traditional financial system. “In periods of stress, uninterrupted access and speed of trading in secondary markets can increase the speed and magnitude of mass sales, pressuring the stablecoin’s peg if redemptions cannot keep pace with demand,” the FSB said. It added that deep and liquid secondary markets can also facilitate arbitrage operations that help stabilise prices around the peg.
The FSB noted that the way stablecoins are used varies by jurisdiction. “The way stablecoins are used in each jurisdiction, whether as a means of payment, store of value or both, will have possible implications for the nature and severity of the vulnerabilities they present,” it said.
Stablecoin reserves may sit in a different country from where the coin circulates. A stablecoin used in Brazil, for instance, may have its backing held in the United States.
Data gaps hinder oversight
The FSB said stablecoin activity generates a large amount of data, but several challenges currently limit its effective use in monitoring vulnerabilities to financial stability. “Some limitations are structural, such as the pseudonymous nature of public blockchains, and are likely to persist without significant changes in the crypto-asset ecosystem,” it said.
Because transactions are pseudonymous, reliable market data is hard to obtain. Authorities instead rely on private tracking firms, which may use differing methods.
The FSB said the G20 recognises the transformative role of stablecoins.
Source: Financial Stability Board
