Stablecoins: Danger or Opportunity? The Urgency of Regulation in the Face of Systemic Risks

Stablecoins: Danger or Opportunity? The Urgency of Regulation in the Face of Systemic Risks

Stablecoins: Opportunities and systemic risks in the financial world

Stablecoins are becoming increasingly popular in today's financial world, especially in cross-border payments. While they can strengthen the US dollar's position as the dominant global currency, they also bring systemic risks that could potentially lead to a new financial crisis. Therefore, comprehensive regulation of these digital assets is crucial.

Systemic risks of stablecoins

A major concern when using stablecoins is the risk associated with the sudden market turbulence. In times of crisis, stablecoin holders may be tempted to quickly convert their tokens into cash. This would force issuers to quickly liquidate their reserves, which could destabilize not only the stablecoin market but other financial markets as well. A historical example of a similar scenario is the financial crisis of 2008. At that time, the Reserve Primary Fund, a major money market fund, collapsed, leading to widespread panic and massive withdrawals from money market funds.

Federal Reserve Governor Lisa D. Cook noted that the risks to stablecoins are analogous to the circumstances at the time. She emphasized that a large liquidation of assets behind a stablecoin could trigger serious disruptions in the financial system.

To counter these dangers, lawmakers are calling for measures to regulate stablecoins. Proposals like the GENIUS Act and the STABLE Act aim to integrate stablecoins into the existing financial system. To do this, issuers would have to be licensed and back their tokens with approved assets such as cash or government bonds.

However, there are also critical voices who point out that these draft laws do not offer sufficient protection. In particular, Senator Elizabeth Warren expressed concerns that the GENIUS Act would allow stablecoin issuers to invest in risky assets that have contributed to the financial crisis in the past.

Global dominance of the US dollar and reactions from China and the EU

The fact that stablecoins denominated in dollars or dollar-backed tokens such as Tether (USDT) and USD Coin (USDC) are widely available strengthens the role of the US dollar in international trade. This has raised concerns among countries such as China about their financial sovereignty. Chinese economist Zhang Ming warned that reliance on US dollar stablecoins could further cement the dollar's hegemony.

To address these challenges, China has accelerated the development of the digital yuan. This move is intended to reduce dependence on dollar-based stablecoins in international transactions. Similar efforts can also be observed in the European Union.

Additionally, traditional financial institutions could disrupt the stablecoin market. Major banks, including Bank of America, are reportedly considering launching their own stablecoin offerings. These developments could intensify competition in the market while promoting deeper integration of stablecoins into the traditional financial system.

Conclusion

Stablecoins are undoubtedly an innovation that offers significant advantages in terms of payment efficiency and international transactions. However, policymakers and financial institutions must act carefully to ensure that regulatory frameworks enable innovation while minimizing associated risks.

The lessons from the 2008 financial crisis are a reminder: even seemingly stable financial instruments can turn out to be risky in times of crisis. To ensure the stability of the financial system, careful regulation and monitoring of stablecoins is essential.