Stablecoins like Facebook's Libra may pose systemic risks, Fed says

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WASHINGTON — Global stablecoins such as Facebook’s proposed Libra cryptocurrency could hurt financial stability if they are improperly designed, according to a Federal Reserve report released Friday.

In light of these concerns, the Federal Reserve and other regulators are closely monitoring such risks to ensure that any stablecoin system with a global scope and scale addresses legal and regulatory challenges before they operate.

“A global stablecoin network, if poorly designed and unregulated, could pose risks to financial stability,” the Fed November financial stability report says. “The failure of a stablecoin to operate as expected could disrupt other parts of the financial system.”

Extreme fluctuations in the value of bitcoin and other cryptocurrencies pose challenges for stablecoins to operate as a medium of exchange, the central bank said. The Fed added that stablecoins can address this volatility by “seeking to tie their value to an asset” such as a domestic currency.

The report also warns that the anonymity often found in stablecoins can facilitate money laundering, terrorist financing and other financial crimes.

“Addressing such vulnerabilities is critical for any stablecoin,” the report says. “Regulators in many jurisdictions have made it clear that stablecoin issuers, operators, and intermediaries are responsible for preventing their systems from being used by criminals to obscure their identity, location, and transactional activity and for ensuring compliance with anti-money-laundering and counter-terrorist-financing laws and regulations in each jurisdiction in which they operate.”

The report also recommends that stablecoin issuers and operators should fully disclose their terms of services, including details on consumer and investor rights and protections, and whether a holder of a stablecoin has the rights to the underlying asset backing the cryptocurrency.

The report comes months after Facebook proposed launching a global cryptocurrency called Libra. That plan has drawn ire from lawmakers and regulators, who warn that many regulatory concerns should be addressed before Facebook moves forward.

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Cryptocurrencies Bitcoin Libra Law and regulation Federal Reserve