A stablecoin collapse could spill into U.S. bond market: Academic

The nearly $1.4 trillion collapse of the cryptocurrency market in 2022 did not affect traditional assets such as stocks or the real economy.

But one academic warns that a major stablecoin failure could impact the U.S. bond market, requiring investors to pay attention as the contagion continues to spread across the industry. It shows some potential new areas.

A stablecoin is a type of digital currency that is supposed to be pegged one-to-one with fiat currencies such as the US dollar or the euro.as an example tether (USDT), US dollar coin (USDC) and binance usd (BUSD) is one of the big three stablecoins.

These kinds of coins will become the backbone of the crypto economy, allowing people to make various cryptocurrency transactions without having to convert their money into fiat currency.

The issuers of these stablecoins say they are backed by real assets such as fiat currencies and bonds so that users can exchange their tokens for real assets 1-for-1.

According to Tether, more than 58% of its reserves are held in US Treasury bills, accounting for about $39.7 billion. Circle, the company behind USDC, has about $12.7 billion worth of Treasury in its reserves. Paxos, which issues BUSD, said it holds about $6 billion in U.S. Treasuries. All of these figures are from the company’s latest report published in November.

However, while there are no signs of major stablecoins collapsing, Cornell University economics professor Eswar Prasad warned that regulations he spoke of could affect traditional financial markets. Officials said they were concerned about it. because it means that you have to sell the This could mean dumping large amounts of US Treasuries.

“I think [the] The regulator’s concern is if trust in stablecoins is lost…there could then be a wave of redemptions, which would have to redeem US Treasuries held by the issuers of the stablecoins. It means we have to,” Prasad told CNBC at the Crypto Finance Conference in St. Moritz, Switzerland, this week.

“And even in a fairly liquid market, a large number of redemptions can cause disruption to the underlying securities markets. Given how important it is, I think it’s understandable that regulators are concerned.”

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

Scholars believe that if such a rise occurred when bond market sentiment was “very weak, as it is in the United States today,” there could be a “multiplier effect” thanks to significant selling pressure on the Treasury. warned that there is

“If there is a massive wave of redemptions that could really undermine the liquidity of that market,” Prasad said.

The Federal Reserve has hiked rates several times in 2022 and is expected to continue to do so this year.US bond market 2022 is the worst year ever.

Stablecoins are important as they represent approximately $145 billion in value out of the $881 billion value of the entire cryptocurrency market. And there were already failures.

Last year, a coin called terraUSD crashed. It was called an algorithmic stablecoin because it maintained a 1:1 peg to the US dollar via its algorithm. Not fully backed by real assets such as bonds like USDC, BUSD, and USDT. the algorithm fails, terraUSD crashedsend Shockwaves Across Crypto Markets.

The US Federal Reserve also issued a warning. report “Stablecoins remain crash-prone, and many bond and bank loan mutual funds remain vulnerable to redemption risk,” it said in May 2022.

Bill Tai, a prominent venture capitalist and crypto industry veteran, said he doesn’t believe the major stablecoins will collapse, but scrutiny of these types of cryptocurrencies is “increasing for good reason. ‘ said.

“Just like the traditional financial industry, where people were caught off-guard by a hidden contagion within the subprime market during the Great Financial Crisis, there is a small amount of leverage in some of the assets that purport to support stablecoins. I think it’s possible,” Ty told CNBC in an interview Thursday.

Tai likened the potential stablecoin explosion to surprises like the subprime mortgage crisis that began in 2007. Lenders provided mortgages to borrowers with poor creditworthiness, leading to defaults and contributing to the financial crisis. It was a bit of a surprise.

“And if one of them (stablecoins) falls, there will be another downdraft,” Tai added.