New York Fed: Current Impact of the Cryptocurrency Industry on Financial Stability is Limited, but Continued Growth May Pose Risks

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 report concludes that due to the limited size of the industry, the risks so far are minimal. However, if the industry grows larger, it could pose risks to the broader financial system. It identified many of the risks outlined in previous reports, but with some nuances. The report mentions that digital assets have gone through significant booms and busts, with multiple factors exacerbating price volatility. These include funding risk or bank run risk. A range of digital asset participants have faced bank runs, including CEX, cryptocurrency lending institutions, stablecoins, and even DeFi protocols. Furthermore, the industry also employs high leverage, which exacerbates other risks, and the crypto ecosystem is highly interconnected. The report states that the lack of a strong and cohesive regulatory environment exacerbates these vulnerabilities, largely because many cryptocurrency entities are located overseas, or entities like DAOs lack a clear legal status. Given that the focus of the assessment is financial stability, the New York Fed did not overly focus on the threat of stablecoins to monetary singularity, but rather specifically on the interconnectivity that stablecoins have within the crypto ecosystem and mainstream economy. The report states: "They seem to not only exacerbate the instability of the digital ecosystem but also introduce systemic risks." The report believes that if stablecoins have poor asset liquidity or longer maturities, maturity transformation could also occur. It acknowledges that the asset quality of large stablecoins has improved over time. However, 15% of Tether's assets remain relatively risky. The ease of switching between stablecoins could amplify the bank run risk of stablecoins. Decentralized stablecoins, such as DAI (now USDS), are considered riskier because DAOs take longer to respond. Regarding interconnectivity, stablecoins are used in lending protocols, so a bank run on stablecoins would lead users to withdraw lending, causing borrowing rates to rise significantly. The report also notes that if large stablecoins suddenly liquidate a significant amount of U.S. Treasury bonds, it could impact mainstream financial markets.