The U.S. Federal Reserve Board has issued a warning about a possible stablecoin crisis and its impact on the global economy.
In its November Financial Stability Report, the central bank explained that “a global stablecoin network, if poorly designed and unregulated, could pose risks to financial stability. The failure of a stablecoin to operate as expected could disrupt other parts of the financial system.”
The board uses the inability to convert stablecoins into domestic currency on demand or to settle payments on time as examples of issues that could cause “credit and liquidity dislocations in the economy” that could potentially lead to a run where holders try to liquidate their stablecoins at the same time. A worst-case scenario would not allow them to do so, which could lead to “potentially severe consequences for domestic or international economic activity, asset prices, or financial stability.”
In an effort to prevent this kind of drastic impact, the Fed recommends that issuers disclose how their staking mechanism works, as well as protect customer data privacy while maintaining KYC records to prevent illegal use. In addition, they need to also make their terms of service clear and inform customers if they have any rights to the underlying asset.
“As the Group of Seven has noted, ‘no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks outlined [in this report] are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks,’” the report explains.
The report comes out as Facebook is trying to launch its own stablecoin, Libra. Politicians from both parties — including President Trump and Treasury Secretary Steven Mnuchin — have criticized Libra. But Facebook CEO Mark Zuckerberg has defended the project, claiming that it could be used as a financial inclusion tool.
“There are more than a billion people around the world who don’t have access to a bank account, but could through mobile phones if the right system existed,” he said last month. “This includes 14 million people here in the U.S. Being shut out of the financial system has real consequences for people’s lives — and it’s often the most disadvantaged people who pay the highest price.”