Federal Reserve

Federal Reserve analyze potential and risks of Stablecoins

Feb 02, 2022
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Researchers from New York Federal Reserve Bank admit that “stablecoins have the potential to provide a level of stability that is on par with traditional forms of safe value.”

Federal Reserve Bank of New York researchers published a study in which they analyze the potential for stablecoins to impact banking system and credit intermediation under three different regulatory frameworks.

According to the researchers, “stablecoins have the potential to spur growth and innovation in payment systems, allowing for faster, cheaper payments” and they may see “further growth through their facilitation of more inclusive payments and financial systems, the tokenization of financial markets, and possible next-generation innovations such as Web 3. (…) With appropriate safeguards and regulations, stablecoins have the potential to provide a level of stability that is on par with traditional forms of safe value.”

Also, the paper higlights that while “stablecoin-related issues may be resolved with appropriate institutional safeguards, regulations, and technical advancements, sustained growth in stablecoins in circulation would ultimately impact the traditional banking system in significant ways.”

The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves” is written in the study. “Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional forms of credit creation. In contrast, a narrow bank approach for digital currencies can lead to disintermediation of traditional banking, but may provide the most stable peg to fiat currencies. Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress.

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