Federal Reserve’s report warns against stablecoins' vulnerability as UST remains depegged

The Fed published a fresh Financial Stability Report, warning that stablecoins could be vulnerable to runs.

Fed's chairman press conference room

The report focuses on volatility in commodity markets and on “key financial system vulnerabilities,” Fed’s Vice Chair Lael Brainard said in a statement accompanying the report.

The Fed described the “rapidly growing stablecoin sector” as “prone to runs,” noting that in March 2022, the total market value of stablecoins grew to over $180bn, with Tether, USDC and BUSD representing over 80% of that sum. The Fed’s report warns that stablecoins can become vulnerable when the assets that back them lose value or liquidity.

The report comes as Terra remains embattled in a crisis triggered by the depegging of its algorithmic stablecoin UST, which fell to lows of $0.67 last night. Some said the depegging could have been caused by an attack mounted by Citadel. Others warn that the crisis could invite more stringent regulations as the Biden administration is working on an “interagency approach” to digital assets.

At the time of the report’s publication, most major cryptocurrencies were in red, with Bitcoin falling below $30,000 for the first time since July 2021. As of this writing, the only tokens listed in the top 50 on CoinMarketCap that flashed green were TRX and stablecoins USDC and DAI.