Even 'Safe' Stablecoins Might Pose Financial Stability Risk, New York Fed Says

Researchers at the Federal Reserve Bank of New York published a new paper claiming Circle's USDC stablecoin poses a risk to the broader financial system.

AccessTimeIconOct 3, 2022 at 5:32 p.m. UTC
Updated May 11, 2023 at 3:54 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

The rise of Circle’s USDC stablecoin – as opposed to the controversial tether (USDT) – is a threat to the broader financial system because it could increase the chance of run risks from smaller issuers, researchers at the Federal Reserve Bank of New York wrote in a new paper published Monday.

“This substitution from tether into USDC illustrates a bigger concern – namely, that resilient stablecoins can amplify run risks from more fragile ones as they provide a convenient instrument to run to,” the report said.

Titled “The Financial Stability Implications of Digital Assets,” the paper comes in the same week the U.S. Financial Stability Oversight Council – a group of regulators led by Treasury Secretary Janet Yellen – is poised to release a report in response to President Joe Biden's executive order calling for a plan to oversee crypto. The report is meant to explore the potential hazards that digital assets pose to the wider financial system.

The U.S. Congress is still in the process of taking action on cryptocurrencies, in particular stablecoins because they pose the largest risk to the broader financial system due to their interconnection to traditional markets. Just Monday, USDT issuer Tether announced it increased its holding of U.S. Treasury bonds to 58.1% of its total portfolio.

“The implications of stress in the crypto ecosystem on financial stability depend crucially on how interconnected it is with the traditional financial sector,” the paper said.

In the past, researchers have often pointed out the danger of stablecoins not being fully backed or being unable to maintain a 1:1 peg to the dollar. The latest report, however, seems more concerned with the risk that one large issuer could have the power to blot out competitors, which could then result in a run on those coins.

To mitigate those risks, the Fed recommends that whichever agency eventually oversees stablecoins should have the authority to implement laws that would facilitate interoperability among stablecoins. It also suggests Congress provide that overseer with a way to limit stablecoin issuers’ affiliations with commercial entities.

The report also followed the President's Working Group’s recommendation that stablecoin issuers should be insured depository institutions.

Jesse Hamilton contributed reporting.


Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

Helene Braun

Helene is a New York-based reporter covering Wall Street, the rise of the spot bitcoin ETFs and crypto exchanges. She is also the co-host of CoinDesk's Markets Daily show. Helene is a graduate of New York University's business and economic reporting program and has appeared on CBS News, YahooFinance and Nasdaq TradeTalks. She holds BTC and ETH.

Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.