The latest cryptocurrency news show that global stablecoins could provide market participants with a cost-efficient means to rebalance their capital across global markets.
Over the past year, three major financial oversight bodies voiced their concerns about potential threats to financial stability purported to be posed by stablecoins. They acknowledged the potential for enhanced payments efficiency, as well as reports from the Bank for International Settlements, the US Federal Reserve and most recently, from the Financial Stability Board which all emphasize certain risks.
In this manner, global stablecoins can promote “financial stability” but their main concern is defined by the FSB as having “potential reach and adoption across multiple jurisdictions and the potential to achieve substantial volume.”
In the FSB report, we could also see a glossary of definitions for key terms, although more was provided for “financial stability.” Basically, now the simplest way to conceive financial stability is with an absence of instability.
Stablecoins can promote financial stability and according to some, help with crises like the global one in 2008. All crises typically shared a common theme: greed, moral failure and excessive risk-taking within the financial services industry. Canada’s top court cited a definition about the risk provided by the Toronto-based legal scholar Michael Trebilcock, saying:
“Risks that occasion a ‘domino effect’ whereby the risk of default by one market participant will impact the ability of others to fulfil their legal obligations, setting off a chain of negative economic consequences that pervade an entire financial system.”
A widely cited American legal scholar also defined the risk and said:
“The potential for substantial volatility in asset prices, corporate liquidity, bankruptcies, and efficiency losses brought on by economic shocks.”
All of the descriptions vividly capture the adverse effects of financial systemic risk, but they also share a common flaw: the reason for such “risks” or “economic shocks” is left entirely unaddressed.
The bottom line is that the real meaning of stablecoins accents that they are on the way to becoming a widely held asset. The reality right now is that stablecoins need to be adopted and put to practice in a regulatory scheme that would work for everyone.
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