Stablecoin collapse could spill over into US bond market: Academic

0 14

The stablecoin run could affect traditional financial markets, the professor warns

The nearly $1.4 trillion collapse of the crypto market in 2022 did not dent traditional assets like stocks or the real economy.

But one academic has warned that a major default could affect the US bond market, marking a potential new area for investors to watch as contagion a ‘ spread throughout the industry.

Stablecoins are a type of digital currency that is intended to be pegged one-to-one with fiat currencies such as the US dollar or the euro. Examples include tether (USDT), a dollar coin (USDC) and Binance USD stock price history (BUSD), which is the three largest stable.

These coins have become the backbone of the crypto economy, allowing people to trade in and out of different cryptocurrencies without needing to convert their money to fiat.

The issuers of these stablecoins claim that they are backed by real assets such as fiat money or bonds so that users can redeem the token one-for-one with real assets.

Tether claims that more than 58% of its reserves are held in US Treasury Bills, amounting to approximately $39.7 billion. Around $12.7 billion of Treasurys are in reserve at Circle, the company behind USDC. Paxos, which issues BUSD, said it has about $6 billion of US Treasury bills. All these figures are from the companies’ latest reports published in November.

But while there are no signs of major stablecoins collapsing, Eswar Prasad, an economics professor at Cornell University, said it’s something regulators he spoke to are worried about. due to its potential impact on traditional financial markets. That’s because a possible run on a stable – where many users are looking to redeem their digital currency for fiat – would mean that the issuer would need the assets in sell their reserve. That could mean dumping a lot of US Treasurys.

“And I think [the] the concern of regulators is if there was a loss of confidence in the stablecoins … then you could have a wave of bailouts, which in turn means that the issuers of the stablecoin will have to sell their holdings of Treasury securities redemption,” Prasad told CNBC at the Crypto Finance Summit in St. Moritz, Switzerland, this week.

“And a large number of bailouts even in a very liquid market can create turbulence in the underlying securities market. And given the importance of the Treasury securities market to the broader financial system in the U.S. … I think that managers have a right responsibility.”

A growing number of voices have warned of the potential impact of a “run” on stability on traditional financial markets.

Just_super | Eddie | Getty Images

Prasad advises regulators around the world on policy related to cryptocurrencies.

The academic warned that if such a run were to occur when bond market sentiment was “very fragile as it is in the US at the moment,” there could be a “multiplier effect” due to significant selling pressure on Treasurys.

“If you have a big wave of bailouts that could hurt liquidity in that market,” Prasad said.

The Federal Reserve raised interest rates several times in 2022 and is expected to continue doing so this year as it looks to stamp out rampant inflation. The US bond market had its worst year in 2022.

Stablecoins account for about $145 billion of value out of the $881 billion worth of the entire cryptocurrency market, so they are important. And there have already been failures.

Last year, a coin called terraUSD collapsed. It was called an algorithmic stable, so called because it maintained the one-to-one peg with the US dollar through an algorithm. It was not fully backed by real assets such as bonds like USDC, BUSD and USDT. The algorithm failed and terraUSD crashed, sending shock waves across the crypto market.

The US Federal Reserve also warned in a May 2022 report that “stable coins are still likely to run, and many bond funds and bank loans remain vulnerable to solvent risks.”

Later pain for crypto but bitcoin has been resilient, VC Bill Tai says

Bill Tai, a well-known venture capitalist and veteran of the crypto industry, said that he does not believe that any of the major stablecoins will decline, but said that the scrutiny of this type of digital currency “has increased for a good cause.”

“I think that just like in our traditional financial industry, where people were arrested by latent contagion within the subprime market during the Great Financial Crisis, a couple of pockets of leverage could to be on some of the assets that claim to support a stable,” Tai told CNBC in an interview on Thursday.

Tai compared a potential dogfight to a dramatic event like the subprime mortgage crisis, which began in 2007. Lenders offered mortgages to borrowers with bad credit, leading to defaults and contribute to the financial crisis. It came as a surprise.

“And if one of these (stablecoins) goes down, there will be another downfall,” Tai said.

Leave A Reply

Your email address will not be published.