Federal Reserve's latest Financial Stability Report: Stabilizing coins may become a new trading medium

Editor's Note: The original title is "Global Stabilization Coin and Financial Stability"

This article was compiled by the Credit Research Institute and selected from the Federal Reserve's Financial Stability Report. The copyright of this article belongs to the original author, only represents the author's own point of view, does not represent the views or positions of the credit letter or the credit research institute.

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Last week, the Federal Reserve released the latest Financial Stability Report. In this report, the Fed warned of the possible risks of stablecoins. We have translated the full text of the relevant part of the report:

A stable currency is a cryptocurrency whose value should be linked to a base asset or a basket of assets. [1] If properly designed and regulated, innovations that promote faster, cheaper, and more inclusive payment methods can complement existing payment systems and improve consumer welfare. However, for financial stability, monetary policy, combating money laundering and terrorist financing, and protecting consumers and investors, the possibility of a stable currency payment network reaching the global reach quickly introduces important challenges and risks.

Stabilizing coins may become a new trading medium…

Price volatility is one of the key issues that have limited early cryptocurrency as a payment instrument. For example, the extreme volatility of Bitcoin's value has made it a bad trading medium; the dollar value of Bitcoin may double in a matter of hours. Stabilizing coins attempt to resolve such volatility by linking their value to assets (for example, the national currency) or a basket of assets (for example, a portfolio of sovereign currencies). Stabilizing currency programs built on existing large cross-border customer networks (such as Facebook's Libra) have the potential to rapidly achieve widespread adoption. These plans are known as "global stability coins."

…but if it is not properly designed and not regulated, it may have a negative impact on financial stability.

If not properly designed and unregulated, the global currency stabilization network may pose a risk to financial stability. Failure to operate as expected will destroy other parts of the financial system. For example, the inability to convert stable currencies into domestic currency or on time payments as needed may create credit and liquidity chaos in the economy. If the credit, liquidity, market and operational risk management of the stable currency is weak, you may face loss of confidence. This loss of confidence can lead to a run, and many holders try to liquidate their stable currency at the same time. In extreme cases, holders may not be able to do so, which may have serious consequences for domestic or international economic activity, asset prices or financial stability.

Stabilizing coins must meet protection measures against money laundering and the financing of terrorism

The anonymity common in stable currencies can be used to mask financial transparency and facilitate money laundering, financing terrorists and other financial crimes. Financial institutions must comply with customer due diligence and other anti-money laundering regulations designed to help detect and disrupt illegal activities. Resolving such vulnerabilities is critical to any stable currency. Regulators in many jurisdictions have made it clear that stable currency issuers, operators and intermediaries are responsible for preventing their systems from being used by criminals to cover up their identity, location and trading activities, and to ensure compliance with their jurisdiction. Anti-money laundering and anti-terrorism financing laws and regulations.

Protection of consumers and investors will be crucial

For any financial product, consumers and investors understand how it works and understand the costs and costs, terms and conditions, and risks associated with the product. Stabilized currency issuers, operators and intermediaries should fully disclose their terms of service. Disclosures should clearly and specifically describe the rights and protections of consumers and investors, including whether holders of stable currencies have any rights to the underlying assets. Publishers should maintain a transparent link between stable currency and underlying assets. Holders must be protected against false and fraudulent transactions and recourse without authorization. In addition, the data privacy of the holder must be properly maintained.

The Fed is closely monitoring the risk of stable currency

Given the range of risks and unresolved issues that have existed so far, the Fed and other regulators are working closely to ensure that any stable currency system of global scale and scope must address a range of core legal and regulatory challenges before it can operate. As the G7 pointed out, “the Global Stabilization Coin project should not be operational until the legal, regulatory and regulatory challenges and the [this report] risk profile are adequately addressed through appropriate design and adherence to clear and risk-aligned regulation. "【2】

[1] Non-collateralized stable currencies (such as algorithmically stable coins) are outside the scope of this discussion.

[2] See G7 Stabilization Coin Working Group (2019), Studying the Impact of Global Stabilizing Coins (Basel, Switzerland: Group of Seven, International Monetary Fund and Bank for International Payments and Market Infrastructure, October), Page iii. Https://www.bis.org/cpmi/publ/d187.pdf.

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