USA: Cryptocurrencies are a risk to the financial system
by FARUK IMAMOVIC | VIEW 807
Stablecoins are a type of cryptocurrency that is usually pegged to the dollar or commodities such as gold, while central bank digital currencies are digital forms of currency issued by governments. The Federal Reserve is considering the introduction of the digital dollar, but has not yet decided whether to issue it.
The United States Federal Reserve (FED) has warned that rising interest rates and stable coins could pose a risk to the U.S. economy. The report contains the Fed's assessment of the resilience of the US financial system and how financial stability can be promoted.
The two most prominent items in the report are the fact that the sharp rise in interest rates is jeopardizing the economy as well as stable coins. The U.S. economy, like many others in the world, is losing value after the Fed raised interest rates by half a percentage point.
The S&P 500 (New York Stock Exchange index NYSE and NASDAQ) yesterday, for the first time since March 2021, closed trading below 4,000, and analysts predict even greater losses. The rise in interest rates was largely the reason behind the market crash.
The world’s largest economy also suffers from high inflation, which affects consumers. The Fed notes that further negative news about inflation and interest rates is creating additional problems.
The Fed warns of higher volatility
"A sharp rise in interest rates could lead to higher volatility, stresses to market liquidity, and a large correction in prices of risky assets, potentially causing losses at a range of financial intermediaries, reducing their ability to raise capital and retain the confidence of their counterparties." the Fed said.
The Fed also believes that stable coins are prone to instability and that, as the sector continues to grow rapidly, it "remains exposed to liquidity risks." The report further states that the assets that support them could lose value and become illiquid.
Some analysts believe that economic turmoil in other markets could lead to a further strengthening of the dollar. For example, if the war in Ukraine continues, then currencies across Europe could face a decline in value. Meanwhile, the US dollar could be a safe haven.