On November 15, 2019, the Board of Governors of the Federal Reserve System (the “Board”) published its most recent “Financial Stability Report” (the “Report”). A section of the Report is entitled “Global Stablecoins and Financial Stability” and offers a view into the Board’s current thinking about stablecoins. (In contrast to more traditional cryptocurrencies, like Bitcoin or Ethereum, which suffer from a number of limitations, including extreme price volatility, the value of a stablecoin is linked to an underlying asset or pool of assets.)
The Board noted that innovations in stablecoins could improve existing payment systems and improve consumer access. The Board, however, added a clear caveat that stablecoin systems needed to be “appropriately designed and regulated.” It also cited concerns over the potential risks a large scale, global stablecoin payment network could have on financial stability, monetary policy, safeguards against money laundering and terrorist financing, and consumer and investor protection.
Other cited concerns relate to stablecoins becoming a new exchange medium and the prospect of possible price volatility—notwithstanding stablecoins attempt to counteract this price volatility risk by linking their value to an asset (e.g., domestic currency) or a pool of assets (e.g., a basket of global fiat currencies). Financial stability also could be disrupted if a stablecoin failed to operate as expected. For instance, the Board described a “run” scenario in which the inability to convert stablecoins into domestic currency on demand or to timely settle payments could create “credit and liquidity dislocations in the overall economy.”
The Board made it clear that stablecoin issuers, operators, and intermediaries are responsible for preventing their systems from being used for criminal purpose, including money laundering and terrorist financing. Consumer and investor protection and data privacy concerns were also highlighted.
Importantly, the Board committed to closely monitor the risks of stablecoins with other international central banks and regulators in order to ensure that any global stablecoin system addresses legal, regulatory, and oversight risks.