In a recent study, the G20 Financial Stability Board (FSB) has considered stablecoins as a threat to the global financial system.
Focusing on regulation and supervision, the study provides recommendations that financial authorities may need to implement when facing a “potential threat”.
The recommendations include the need for cross-border “multilateral action”. However, the study could be the beginning of a trend with disastrous results for major cryptocurrencies, including Bitcoin and Ethereum.
According to the report, stablecoin is a crypto-asset that has a stable value as regards a certain asset or pool of assets:
“In turn, the value of these assets typically determines or affects the market value of a stablecoin. A stablecoin may also employ algorithmic or other means to stabilize or impact its market value by, for example, automatically adjusting its supply in response to changes in demand.”
Stablecoins offer freedom for low-cost transfers
The FSB also explained that such coins have a tremendous potential to add to the development of the global payment network. A stablecoin, such as Facebook’s Libra, could offer users around the world more freedom for low-cost transfers. In addition, it offers access to the international financial system without having a bank account.
The report further stated that such advantages theoretically make such coins risky for the financial sector and the global economy. The FSB lists “substitution of domestic currencies” among the threats. In addition, it addresses over 10 risks in multiple fields, including investor safety, financial stability, cyber security, and market integrity.
The study also stated that there is no currently stablecoins with the characteristics or capabilities to be a threat. However, every project needs a large customer base to be a hazard.
The FSB went on to say:
“The use of stablecoins as a means of payment or a store of value might significantly increase in the future, possibly across multiple jurisdictions. In addition, the different activities within a stablecoin arrangement, in particular those related to managing the reserve assets, may considerably increase linkages to the existing financial system.”
Stablecoins face major challenges
With the USD interest rates reaching zero percent and the U.S. Treasury yields turning negative, stablecoins which depend on such rates and yields face major challenges.
Although some analysts consider that reliance on interest rates will not be possible in the current environment, they do not expect major stablecoins to collapse. Most of such stablecoins will overcome such challenges during the crisis, while others will diversify their sources of income.