Fed Res says a two-tiered system on Stablecoins creates less risk to US financial stability

The Federal Reserve published its research on Stablecoins use in the country and associated risks to use under the regulation system.

The federal reserve released its research report on Stablecoins entitled “Stablecoins: Growth Potential and Impact on Banking”. Through the research, it found that regulation on Stablecoins still may result in huge risk to the financial stability. 

The report stated that Stabelcoins is a better option for the crypto traders to do activities in the crypto market but during abnormal market situations, its prices go small down and sometimes more up than what the stable coins have value behind the pegged reserved dollar.

“These episodes demonstrate the potential for stablecoins to serve as a digital haven during market distress.”

The further report noted that mass adoption of stable coins may result in a big risk under some situations but it can be easily lowered with the audits and liquidity provisions on the stable coins provider’s companies. But noted at the same time that the biggest stablecoins issuer company USDT always tried to avoid the full audits.

Stability in prices with risk 

The authors of this research noted that high prices of stablecoins may be easily lowered with the help of two-tiered intermediation. On one side better regulation and another side deposit of the reserved funds behind stablecoins to the commercial banks. 

The researchers noted that a two-tier system based regulatory framework on the activities is much better to give stability but if we replace such rules with narrow banks then in that situation there are huge chances that we will be able to see some better stability but in that situation, there will be a risk of financial stability to the US economy. 

“The narrow bank approach could lead to an expansion of the central bank’s balance sheet to accommodate the demand for reserve balances from stable coin issuers.”

The research noted that narrow banking two-tier approach based regulation may further result in destabilizing the situation in the potential of the banking system and also it will impact the balance sheet of the Federal Reserve because people will move toward the stable coins as a haven. 

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