The Financial Stability Board Warns Stablecoins Are Not “Stable”

According to a report issued by the Financial Stability Board on October 11, stablecoins do not meet the digital asset criteria set by central bankers of the world’s largest economies, and many of them have no credible mechanisms to support their price stability promises.

How “Stable” Stablecoins Actually Are?

As a group of central bankers and financial regulators from across the G20, the Financial Stability Board has also cast doubt on stablecoins’ stability.

In spite of the fact that senior central bankers and regulators from a variety of large economies lead the financial research and policy organization, the organization does not make binding recommendations.

However, high-level recommendations around crypto assets and warnings against stablecoins will be taken seriously by policymakers and financial institutions worldwide.

Two reports were released by the regulatory body on Tuesday, one of which revolved around high-level recommendations pertaining to crypto assets, which will be finalized next year after public commenting.

Secondly, it assesses how widely stablecoin issuers would meet the 2020 group’s “High-Standard” criteria.

Concerning on How Stablecoin Maintain Their Pricing

As a result of limitations on redemptions, including the ability to delay or deny them, the FSB found that the majority of stablecoin holders need to liquidate them through exchanges and the price may drop below the value of the currency to which the stablecoin is pegged.

Also, the FSB expressed doubt about the stability of stablecoins under market stress, stating that,  “most stablecoins enable arbitrage activities of market participants and to a considerable extent rely on them.” 

Moreover, it’s unclear how stable prices would be under adverse conditions, “ “raising questions about the effectiveness of the stabilization mechanisms in supporting a stable price at all times.”

The research on stablecoins is conducted by the European Central Bank, US Federal Reserve and other central banks as they are unsure whether or not to issue their own digital currencies. 

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Jamilatul Mahmudah

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