On Monday, the Federal Reserve Bank of New York posted an article claiming that Circle’s USDC is risky to the general financial system, unlike the USDT, which is safe. According to the Federal Reserve Bank of New York researchers, Circle’s USDC is a threat because its chances of increasing risks from smaller issuers are high.
The paper was released the same week that the U.S. Financial Stability Oversight Council was supposed to release a report responding to President Joe Biden’s plan to oversee crypto. The report Federal Reserve Bank of New York states that,
“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 explores possible risks in which digital assets expose the general financial system. Besides, many crypto researchers claim that USDC is a risky investment. As a result, several regulatory agencies scrutinize stablecoins like USDC regardless of their lower price volatility than other cryptocurrencies.
U.S. Congress and Cryptocurrency
The U.S. Congress is still taking action on cryptocurrencies, particularly stablecoins, because of their possible risks to the general financial system. This is because of their connection to traditional markets. After all, USDT issuer Tether announced that it raised its holding of America’s treasury bonds to 58.1% of the total on Monday. This was made clear in a newspaper that wrote,
“The implications of stress in the crypto ecosystem on financial stability depend on how interconnected it is with the traditional financial sector.”
Additionally, stablecoins are not grouped as bank deposits; therefore, they pass through the regulatory cracks, limiting offices like the Comptroller of the Currency and the Fed to oversee them. On top of that, Analyzers in the past have consistently exposed the risks of stablecoins, for example, stablecoins are not fully backed, and they cannot maintain a 1:1 peg to the dollar currency.
However, the current report about cryptocurrency focuses on the possibility of a large issuer blotting out competitors, leading to a run on the stablecoins. The Fed recommends that any company that oversees stablecoins must be mandated to formulate and implement laws that would promote a good relationship between stablecoins to limit the risks of stablecoins.
FED Minimizing Crypto Risks
Moreover, the FED also suggested minimizing risks such as big issuers blotting out small issuers concerning stablecoins issuing. Congress needs to provide an overseer with possible ways to reduce the affiliations of stablecoin issuers with commercial organizations. As per the recommendations of the President’s Working Group, the stablecoins must be insured depository institution, a suggestion that the report followed.
The Federal Reserve, the FED, is America’s central banking system. It is considered the most powerful economic institution in America, responsible for setting interest rates, regulating financial markets, and managing the money supply.
That is why it features so much in any financial topic, including cryptocurrencies, thus the report written by the Federal Reserve Bank of New York concerning stablecoin USDC.