The U.S. Federal Reserve, the country’s central bank, has said that stablecoin projects such as Facebook-led Libra could become a “new medium of exchange” if properly designed and regulated.
Libra like global stablecoin initiatives “have the potential to rapidly achieve widespread adoption,” said the central bank in its latest Financial Stability Report published Friday.
However, if improperly designed and unregulated, stablecoins could pose risks to financial stability, said the Fed. For instance, the inability to convert stablecoins into domestic currency on demand or to settle payments on time. “In an extreme scenario, holders may be unable to [liquidate], with potentially severe consequences for domestic or international economic activity, asset prices, or financial stability,” according to the central bank.
Stablecoins must also meet anti-money laundering and counter-terrorist financing rules, said the Fed, adding that issuers should fully disclose the terms of their services; should be transparent on how a stablecoin is tied to an underlying asset, and holders’ data privacy must be appropriately maintained.
“As the Group of Seven has noted, ‘no global stablecoin project should begin operation until the legal, regulatory and oversight challenges and risks…are adequately addressed, through appropriate designs and by adhering to regulation that is clear and proportionate to the risks,’” concluded the central bank.
Overall, the Fed’s report seems fairly optimistic, although with some warnings. In July as well, Fed Chairman Jerome Powell said that Libra project cannot “go forward” without first addressing concerns regarding money laundering, privacy, and customer protection, among other issues.