Odaily Planet Daily News: The New York Federal Reserve (NY Fed) released a report this month on the impact of digital assets on financial stability. The conclusion drawn from the report is that due to the limited scale of the industry, the risk has been minimal so far. But if the industry becomes bigger, it may pose risks to the broader financial system. It identified many of the risks outlined in the previous report, but with some subtle differences.
The report mentions that digital assets have experienced tremendous prosperity and depression, with multiple factors exacerbating price fluctuations. This includes funding risk or run on risk. A series of digital asset participants have experienced runs, including CEX, cryptocurrency lending institutions, stablecoins, and even DeFi protocols.
In addition, the industry also uses high leverage, which exacerbates other risks, and the cryptocurrency ecosystem is highly interconnected.
The report states that the lack of a strong and cohesive regulatory environment exacerbates these vulnerabilities, largely due to many cryptocurrency entities being located overseas or entities like DAOs lacking clear legal status.
Given that the focus of the assessment is on financial stability, the New York Federal Reserve did not pay too much attention to the threat of stablecoins to currency singularity, but rather specifically focused on the interconnectedness of stablecoins in the cryptocurrency ecosystem and mainstream economy. The report states, "They seem to not only exacerbate the instability of the digital ecosystem, but also bring systemic risks
The report suggests that if the asset liquidity of stablecoins is poor or their maturity is long, maturity transformation may also occur. It acknowledges that the asset quality of large stablecoins has improved over time. However, 15% of Tether's assets are still relatively risky.
The easy switching between stablecoins may amplify the risk of stablecoin runs. Decentralized stablecoins, such as DAI (now USDS), are considered more risky because DAOs require longer time to react.
Regarding interconnectivity, stablecoins are used for lending protocols, so a run on stablecoins can lead to users withdrawing their loans and significantly increasing borrowing rates. The report also points out that if a large stable currency suddenly liquidates a large number of US treasury bond bonds, this may affect the mainstream financial market.
