FSB Chair Klaas Knot: Stablecoins Are ‘Segment We Must Monitor Closely’

Outgoing Financial Stability Board Chair Klaas Knot said cryptocurrency-related risks could soon pose a major threat.

“At the FSB, we have long maintained that crypto does not yet pose a systemic risk, but recent developments suggest we may be approaching a tipping point,” Knot said in Madrid Thursday (June 12), according to a transcript of his speech. “Barriers for retail users have dropped significantly, particularly with the introduction of crypto ETFs. The interlinkages with the traditional financial system continue to grow.”

He said stablecoin issuers “now hold substantial amounts of U.S. Treasuries,” per the transcript. “This is a segment we must monitor closely.”

Stablecoins are at the center of legislation before Congress in the United States, part of a crypto-sector-backed push to create new digital asset rules. Meanwhile, several European Central Bank policymakers have expressed concern about related risks, Bloomberg reported Thursday.

In its FSB review last month, the ECB also cited risks from crypto assets such as stablecoins, especially considering increasing valuations and closer ties between the digital-asset ecosystem and mainstream finance, according to the report.

Unlike bitcoin or memecoins, whose value is based on the mood of the market, stablecoins are digital tokens pegged to fiat currency. However, there are risks inherent in the way stablecoins are constructed, PYMNTS reported in May, as the reserves that help maintain the peg of the coin are often a blend of assets that can be exposed to market shocks.

“If there are fluctuations, stablecoin issuers must sell or rebalance those holdings to keep the peg or meet redemptions if and when they are demanded by holders,” PYMNTS wrote.

If an issuer must sell assets in response to a swell in redemptions, losses may ensue.

Knot’s warning followed a report about analyst concerns that rising stablecoin adoption could increase the volatility of U.S. Treasury securities with short-term maturities. Some analysts said that as stablecoins grow, their volatility could spread to the bills market.

A disruption in the stablecoin market could lead to liquidations that could drive down Treasury prices. In addition, if money shifts from bank deposits to the stablecoin market, it could drive down demand for U.S. Treasuries from banks.