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Crypto Market Faces its Biggest Risk Yet as Central Banks Make a Surprising Move

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Christina Comben | Apr 15, 2020 | 09:21

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Crypto Market Faces its Biggest Risk Yet as Central Banks Make a Surprising Move

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Christina Comben | Apr 15, 2020 | 09:21


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Central banks are concerned about the widespread adoption of stablecoins threatening the global financial system. As they make recommendations to heavily regulate or even ban them, the Crypto market now faces its biggest threat yet.

Financial Stability Board (FSB) Recommendations Brutal for Digital Assets

In a document published yesterday, the Financial Stability Board (FSB) outlined its concerns about stablecoins in the global financial market. Since stablecoins “enhance the efficiency of the provision of financial services,” that’s a problem for the status quo.

Widespread adoption, they believe, would give rise to an independent financial system out of their control. It could even replace fiat currencies and “exacerbate bank runs.”

The fears of the risks stablecoins used by the crypto market pose to financial stability have long been backed by countries like China and France. The French AMF last week recommended that the EU create specific regulations for stablecoins stating that they posed “systemic risks” to the Union.åç

Among the FSH guidelines are many recommendations that fall short of an outright ban. These include urging local central banks to comprehensively regulate, supervise, and control stablecoins. They also suggest that governance frameworks are put in place to identify accountability and ensure that all stablecoins provide transparent information.

The recommendations do, however, go as far as to say that local authorities should ban stablecoins completely if needed, including those that run on fully decentralized systems, like crypto networks such as Ethereum.

Crypto Market Could Suffer Greatly From Stablecoin Ban

A ban on stablecoins could be potentially very scary, indeed. To start with, it would practically wipe out the entire DeFi movement and projects like MakerDAO and Compound. Worse still, it could cause an overreaching liquidity crisis across the market.

Just consider stablecoins like Tether (USDT) and TrueUSD (TUSD) that are both backed by the US dollar. For many users around the world, stablecoins are crucial in trading crypto assets like bitcoin.

Let’s take powerhouse Binance as the best example. Currently, it is number one in terms of trading volume. Yet Binance only uses stablecoins like Tether, Binance USD, and Paxos Dollar. As Bitcoinist reported yesterday, there is $1bn of USDT sitting on Binance right now.

This is a positive sign for crypto as it suggests that traders are steadily sending their stablecoins to the exchange in order to scoop up crypto assets. It appears that many investors are waiting for the right time to convert their holdings to BTC and potentially sparking a new rally. Yet all that could be halted if the FSB recommendations are adopted. 

In practice, they may not result in an actual ban. However, they could subject cryptocurrency exchanges and service providers to the same scrutinous regulations as banks and other FSIs. This could push many projects and companies out of business.

And an outright ban that sees behemoth stablecoins like Tether leave the market could also see a mass exodus of traders and a liquidity crisis like nothing the crypto market has previously faced.

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