New Fed report again warns of stablecoin run risk as UST loses its footing

New Fed report again warns of stablecoin run risk as UST loses its footing

The Federal Reserve's semi-annual report was released on the same day that Terra's UST stablecoin, which is pegged to the dollar, fell as low as $0.95.

The U.S. government continues to view stablecoins as a potential threat to the stability of the financial system. Both the Federal Reserve and a senior Treasury official said Monday that the tokens could face a dangerous rush of customers.

While government officials expressed their doubts about the sector, TerraUSD (UST), which burns and mints its sister token LUNA to absorb price shocks, lost its peg to the dollar for the second time in three days on Monday.

The Federal Reserve's latest Financial Stability Report issued a timely warning that the risk of sudden, desperate redemptions of stablecoins - crypto tokens pegged to the value of another asset like the dollar - is similar to the risk of runs in money market funds.

The report, the last version of which issued a similar warning in November, is a semiannual publication by the Fed 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 risk and liquidity of assets backing stablecoins," the report says, noting that more than 80% of the market's activity is concentrated in three names: Tether (USDT), USDC and Binance USD (BUSD).

The documents also pointed to a previously unspecified concern that "the increasing use of stablecoins to cover margin requirements for leveraged trading in other cryptocurrencies could increase 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 trigger destabilizing runs if the value of the assets backing the stablecoin drops abruptly," said Liang, who is leading the Treasury Department's work to determine how the federal government should oversee digital assets. She also said stablecoins could pose "a novel risk - payment system risk - associated with distributed ledger technology."