In a recent research paper titled "Stablecoins: Growth Potential and Impact on Banking," the Federal Reserve Board ("FRB") detailed (i) the current use and growth opportunities of stablecoins and (ii) the potential for stablecoins to broadly impact the banking system.
Unlike the conclusions drawn by the President's Working Group ("PWG"), which recommended limiting issuance of stablecoins to insured depository institutions to address certain identified risks, the FRB researchers found "that dollar-pegged stablecoins have exhibited safe asset qualities in that their prices in the secondary market temporarily rise above the peg during times of extreme market distress, incentivizing the issuance of more stablecoins."
The report concluded that a broad adoption of asset-backed stablecoins can potentially be supported within a two-tiered, fractional reserve banking system without a negative impact on credit intermediation because stablecoin reserves would be held as commercial bank deposits. By contrast, a "narrow bank" stablecoin framework, in which stablecoin issuers are required to back their stablecoins with central bank reserves, could potentially reduce credit intermediation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
