U.S. Central Bank Says Large Scale Adoption Of Stablecoins Could Pose A Severe Risk To Financial Stability
Regulators just can’t get enough of crypto.
Just eight days after the U.S. Treasury sanctioned Tornado Cash, the Federal Reserve is asking all regulated banks to keep it informed about all crypto-related activities.
According to the Aug. 16 letter, banks should assess if the crypto-asset activities they engage in are legally permissible under state and federal laws. In addition, banks are asked to notify the Fed before starting any new crypto activities.
The Fed highlights a myriad of risks inherent to crypto, calling the technology “nascent and evolving” while being particularly critical of “open, permissionless networks.”.
“Crypto-assets can be used to facilitate money laundering and illicit financing. Some crypto-assets have limited transparency, making it difficult to identify and track ownership.” the letter says.
The implosion of UST and other algorithmic stablecoins earlier this year has not gone unnoticed. The Fed notes that stablecoins, if adopted at large, could pose a severe risk to financial stability, including “potentially through destabilizing runs and disruptions in the payment systems”.
Under The Microscope
Earlier this month, the Office of Foreign Asset Control (OFAC) sanctioned Tornado Cash, a crypto privacy mixer, and barred US persons and entities from interacting with the protocol.
This led to a dusting attack in which users started sending tainted ETH from Tornado to celebrities and prominent community figures as a form of protest.
The fallout from the move is still being felt as major DeFi protocols including Aave, Uniswap, dYdX and Balancer have stated barring users whose wallets have interacted with Tornado Cash. In many cases, the banned addresses have not interacted directly with the privacy protocol.
Tarang Khaitan discovered crypto in 2017 and has been actively involved in the space since. In his spare time, he likes to find new dApps being built in the Web3 space.