The Reserve Bank of Australia Sees Stablecoins As Future Risks

The Reserve Bank of Australia (RBA) released a report on stablecoins, including aspects of its “Market Developments, Risks, and Regulation.” The report indicates that if stablecoin’s growth continues, there might be risks in the future.

Australians are increasingly interested in investing in cryptos. Their awareness and usage of crypto are growing every year, despite the operational and law challenges they face.

In January 2022, according to a recent report by Finders, Australia was ranked 9th out of 26 nations for the adoption of cryptocurrencies. It has a 17% crypto ownership rate, which is higher than the 15% global average.

However, there is an increasing interest worldwide in stablecoins as well. Over the past several years, its market has expanded significantly, with activity focused on a small number of stablecoins pegged to the US dollar. 

These mostly support the speculative trading of digital assets. When people use these coins, they don’t have to trade constantly between converting money and currencies, which may lead to higher costs and less efficient trades.

Stablecoins Risks 

Besides its efficiency, the report also states the specific risks of stablecoins. The report uses the crash of Terra and Meta’s proposed Diem coin as examples. Stablecoin stability rests on investor faith in the value of an unsubstantiated crypto asset. 

The report said that the global regulatory community had been closely watching Meta’s Diem project. Because it had the potential to grow rapidly and maybe reach a size that would have had systemic effects.

According to the statement:

Following several changes to the structure and scope of the Diem project aimed at addressing regulators’ concerns, it was announced in early 2022 that the project was being wound down and the remaining assets sold to the owners of Silvergate Bank.

The report also focuses on Tether, which saw selling pressure due to a decline in users’ confidence. Tether briefly lost its link to the US dollar, dropping to a low of about US$0.95.

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Since the stability of the peg rests on users’ belief in the value of a similar unbacked crypto asset, algorithmic stablecoins are inherently fragile. The recent crash of TerraUSD brought attention to the instability of such coins.

Nevertheless, Stablecoins do not much threaten financial stability right now due to their relatively small size and limited usage outside the crypto ecosystem. While future risks could arise if growth continues.

The report asserts that:

Similar to other financial products, stablecoins carry risks for investors and users. These risks depend on a range of factors, including the design of the stablecoin arrangement and its applications.