The US Federal Reserve has released a report on stablecoins, recognizing that although in their infancy, stablecoins have a high innovation potential and could bring efficiency to payment systems and inclusiveness to the traditional financial system.
The document is overwhelming on stablecoins’ use cases with innovations that transcend the digital asset markets. In the Federal Reserve’s view, stablecoins can be used as currencies to onramp on digital markets, as facilitators of peer-to-peer cross-border payments, capable of providing institutional liquidity management for large banks, and as facilitators of faster and cheaper internal transfers.
Regarding innovation, stablecoins could foster inclusive financial systems, tokenization of financial markets, increase speed and settlement of microtransactions and allow the financial intermediaries to harness next-generation innovations in Web 3.0.
It is worth noting that the Monetary Authority of the United States with resonance in global financial markets deployed a research study with different scenarios assessing the potential of stablecoins, proposing a symbiotic relationship with traditional financial systems, for instance, according to the document, the programmability features of stablecoins built on Distributed Ledger Technologies could allow for tokenizing securities, boosting trade with a real-time settlement at lower costs.
Among the benefits of tokenization, the study finds higher liquidity, transaction speed, and transparency, whilst reducing counterparty risks, trading costs, and barriers to market participation. Moreover, smart contracts could automate cross-currency swaps, security servicing, and regulatory compliance.
The study analyzes a two-tiered intermediation framework in which stablecoins could improve credit provision in a highly complex banking system. In this scenario, banks would engage in fractional-reserve stablecoin deposits, expanding credit and security holdings, whilst central banks shrink their balance sheets as reserves in stablecoin and cash liabilities are reduced. Households accumulate assets, funding the expansion in bank loans.
The research finds that stablecoins are resilient in crypto bear markets, serving as safe havens, increasing their supply and downward price pressure. In addition, in times of market distress, stablecoins show different behaviour compared with prime money market funds, whilst the former experience increased purchase reserves, the latter experience large outflows.
Among other takeaways, the Federal Reserve is aware that further research is required. Nonetheless, these preliminary findings shed light on optimism or perhaps the inevitable position that decentralized networks are for massive adoption and governments cannot continue hiding the Sun with the thumb. To see what the regulatory sandboxes in the United States might be.
However, the propensity to harness stablecoins and programmability of money to improve the traditional financial market performance is ushered in.