Since the UST collapse in May, the market has been mindful of the risk that stablecoins pose to the market. But this risk is not restricted to cryptocurrencies, at least according to Eswar Prasad, a professor at Cornell University in the United States. During an interview with CNBC, Prasad, who is a professor of economics, said he had spoken with people linked to the financial market. And in those conversations, regulators said that stablecoins could impact traditional financial markets as well. In this sense, regulators are more attentive to the bond market, or US debt securities. This market includes bonds issued by both private companies and the government. For example, government bonds and what is known in Brazil as debentures.
The backing of stablecoins
According to Prasad, the question of the risk of stablecoins lies in the way these cryptocurrencies operate. Stablecoins are cryptocurrencies that have a peg with some fiat currency. USDT and USDC, for example, are pegged to the US dollar. To maintain this parity, stablecoins need to have reserves that guarantee their value. If there are a million USDT on the market, Tether, the issuer of this stablecoin, needs to have at least $1 million in its reserves. This money serves to prevent the loss of parity and an eventual collapse of the stablecoin. But according to the latest data, Tether has more than 58% of its reserves held in US Treasuries. That is, a percentage equivalent to approximately US$ 39.7 billion. Similarly, Circle, the issuer of USDC, has about $12.7 billion in Treasuries.
risk of falling
As long as users remain confident in stablecoins, there is no risk. But with market instability, this confidence gradually decreases. Tether, for example, saw the USDT market cap drop from $78 billion to the current $66 billion. This means that users have withdrawn their USDT in exchange for dollars – and this is where, according to Prasad, the danger lies. A crisis of confidence in a stablecoin would cause users to redeem their crypto assets for fiat. This, in turn, would cause the issuer to sell its assets in reserves to honor the withdrawals. In an extreme situation, of complete loss of confidence in stablecoins, issuers would have to sell large amounts of US Treasuries. “And I think that [a] regulators’ concern is if there was a loss of confidence in stablecoins,” said the professor. A large volume of redemptions, even in a highly liquid market, can create turmoil in the securities market, given the importance of the Treasury bond market to the US financial system. I think regulators are rightly concerned,” added Prasad. He also mentioned that bond market sentiment is already fragile in the US right now. Thus, any incident of a stablecoin run could lead to a multiplier effect and create huge selling pressure on securities.
