Federal Reserve Governor Lael Brainard, nominated by President Biden to be the Vice Chair of Supervision at the Fed, issued a warning Friday about the rapid growth of stablecoins. Before the 2022 US Monetary Policy Forum, Brainard forecast, “If current trends continue, the stablecoin market in the future could come to be dominated by just one or two issuers.”
Brainard described a ‘crypto finance ecosystem’ – specifically decentralized finance (DeFi) – as responsible for a fueling a demand for stablecoins that has led to rapid growth. Brainard also warned of the prominence of crypto ads seen in the Super Bowl should be a signal of an increased exposure of retail investors to stablecoins.
Meanwhile, both the Senate Banking Committee and House Financial Services Committee held hearings over the past two weeks exclusively focused on stablecoins. Brainard herself awaits a decision from the Hill regarding her nomination at the Fed, which appears stalled in the Senate for her and other nominees as a result of a disagreement between the White House and GOP Senators over one of the nominees, which is not Governor Brainard .
The Risks Of Stablecoins To The Global Economy
According to Brainard, stablecoin issuers themselves predict, “…that stablecoins will also have an expanded reach in the payment system and be commonly used for everyday transactions, both domestic and cross-border.” Assuming this is a future state for the markets, Brainard prescribed regulators implement, “strong frameworks for the quality and sufficiency of reserves and risk management and governance, with respect to the stablecoin marketplace.”
Regarding the potential for one or two stablecoin issuers to dominate the market, results from Messari, a leading crypto market intelligence firm, shows the two leading stablecoin issuers as Tether (USDT) and Circle (USDC), which are #3 and #4 in total market cap that are combined $407 billion in size.
“…As of January 2022, the largest stablecoin by market capitalization made up almost half of the market, and the four largest stablecoins together made up almost 90 percent,” said Brainard.
The risks of stablecoins have been laid out in the recent report by the President’s Working Group on Financial Markets. Brainard argued the three key risks of stablecoins highlighted by the report – bank run risk, settlement risk, and systemic risk – would need to be addressed specifically as a result of the growing concentration in the stablecoin issuer marketplace.