New Fed Report Repeats Warning About Stablecoin Run Risks as UST Loses Peg

The Federal Reserve’s biannual report came out on the same day Terra’s dollar-pegged UST stablecoin fell below $0.85.

The U.S. government is continuing to cast stablecoins as a potential threat to the stability of the financial system, with both the Federal Reserve and a senior Treasury official saying Monday the tokens could experience dangerous customer runs.

As government officials expressed their doubts about the sector, terraUSD (UST), which burns and mints its sister token LUNA to absorb shocks to its price, lost its peg to the dollar on Monday for a second time in three days. UST, one of the top stablecoins in circulation, dropped well below $0.85 at one point late Monday.

The Fed’s latest “Financial Stability Report” issued a potentially well-timed warning that the risk of sudden, desperate redemptions of stablecoins – crypto tokens pegged to the value of another asset like the dollar – is akin to the risk of runs in money-market funds.

The report, which included a similar warning in the most recent version in November, is a biannual publication the Fed produces to assess ongoing risks to the stability of the U.S. financial system.

“These vulnerabilities may be exacerbated by a lack of transparency regarding the riskiness and liquidity of assets backing stablecoins,” according to the report, which noted that the market is concentrated with more than 80% of its activity in three names: tether (USDT), USDC and binance USD (BUSD).

The documents also flagged a worry not detailed previously that “the increasing use of stablecoins to meet margin requirements for levered trading in other cryptocurrencies may amplify volatility.”

On the same day, Nellie Liang, the Treasury Department’s undersecretary for Domestic Finance, spoke about stablecoins at an event hosted by the Federal Reserve Bank of Atlanta.

“They have the potential to generate destabilizing runs if the value of the assets backing the stablecoin decline abruptly,” said Liang, who has been leading the Treasury’s work to determine how the federal government should oversee digital assets. She also said that stablecoins may “introduce novel risk – payment system risk – related to the distributed ledger technology.”

U.S. regulators, including Securities and Exchange Commission Chair Gary Gensler, have sometimes compared stablecoins to money-market funds. Investors in money markets are similarly supposed to be able to count on getting a dollar back for each dollar invested, though the short-term investment funds are also meant to provide an additional small return.