Column: Stablecoin instability baffles regulators | WKZO | All Kalamazoo

By Mike Dolan

LONDON (Reuters) – Regulators worry how the rise in ‘stablecoins’ – primarily dollar-linked crypto tokens – could sow instability in broader financial markets more directly than already hyper-currencies. volatile like Bitcoin.

Western central banks and watchdogs have so far mainly steered clear of cryptocurrencies, emphasizing transparency and a “cautionary” approach to what is happening. ‘they see themselves as largely speculative vehicles rather than as transaction currencies per se.

The growing involvement of traditional banks and asset managers is pushing them up the radar screen, but tougher restrictions don’t appear to be imminent just yet.

But the explosive issuance of stablecoins, which has risen 18-fold from the pandemic to over $ 100 billion, is another matter and has sounded the alarm bells all year round.

Stablecoins are essentially cryptocurrencies – verified on decentralized public ledgers or blockchains – but are designed to have a stable value against hard currencies or gold to avoid the kind of volatility that makes bitcoin and other tokens almost impossible for most businesses.

Although they operate independently of traditional banking systems, it is the assets they use to theoretically anchor their value that loops them into the real world – much like a science fiction portal to the “upside down” world of. the crypto to the hardware world that monitors get paid to worry.

Whether ultimately used for online payments or simply to grease the cogs of the so-called decentralized finance of crypto credit markets, the stablecoin universe has so far been dominated by two main tokens, Tether and USD. Corner.

Facebook-backed Diem, formerly known as Libra, is another in the works. But it has yet to be launched amid government scrutiny and a step back on its potential scale and systemic risks.

Launched in 2014, however, Tether already accounts for over 60% of the total of $ 100 billion currently issued.

What it uses as reserves to fill the promised one-to-one peg with the dollar is what annoys regulators. It’s not just dollar cash, as many might assume, but a mix of commercial paper, notes, bonds, and loans.

According to Tether, about 50% of its reserves – some $ 20 billion – were in commercial paper at the end of March, 12% in secured loans and 10% in corporate bonds, funds and precious metals. Only 2.9% were cash in dollars.

Rating agency Fitch warned this month that the rapid growth of stablecoins could have destabilizing effects on short-term credit markets, although it acknowledged that the patterns differ and that USD Coin – over 20% of the stablecoin complex – secures its dollar peg with cash on deposit accounts.

“Potential risks of asset contagion from liquidating stable reserve holdings could increase pressure for tighter nascent industry regulation,” he said, adding that Tether’s CP holdings could be larger. than most US or European money market funds.

“A sudden massive buyout of USDT (Tether) could affect the stability of short-term credit markets if it occurs during a period of greater selling pressure in the CP market, especially if it is associated with larger redemptions of other stablecoins that hold reserves in similar assets, ”Fitch said, signaling the break in the peg for stablecoin Iron last month.

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This is where the Federal Reserve is at least focusing.

Late last month, Boston Fed chief Eric Rosengren shed light on the “exponential” growth in stablecoins and the potential issues surrounding the reserve mix behind Tether.

“Indeed, this is a very risky blue chip fund,” Rosengren told an OMFIF financial stability conference, noting that blue chip US money market funds would not be. allowed to hold many of these assets, such as longer-term securities or precious metals.

“A stablecoin that has this kind of characteristic… will not be stable at a time when we will see the spreads widen significantly,” Rosengren added, noting that blue-chip funds have struggled for the past two. recessions.

“There is a problem with financial stability as they are increasing and we need to look at the regulations and what has been marketed to the general public,” he said.

Focusing more on any broadening of the use of stablecoins as payments, as in the case of Diem, the Bank of England insists that they should be regulated in the same way as commercial bank money and have equivalent capital and liquidity rules and offer deposit insurance.

Moving his plans from Switzerland to the United States in May, Diem said his planned dollar stable coin would be issued by California-based Silvergate Bank. Silvergate would manage the reserves that back it – reserves, according to Fitch, would be at least 80% in low-risk short-term government securities and 20% in cash periodically placed in money market funds.

US and EU legislation that deals with stable coins and the management of their reserves has been introduced since late last year – and Fitch claims this could lead to greater transparency and reporting as well as less risky reserve guarantees.

But there seems to be little clarity on the progress or timing of any of these movements.

“We believe authorities are unlikely to step in to save stablecoins in the event of a disruptive event, in part due to moral hazard,” Fitch concluded. But he added that “authorities could step in to support brokers and major money market funds if stablecoin buybacks lead or amplify a wider sell-off of CPs, putting pressure on market liquidity and hampering the issuance of new CPs. “.

If an independent approach to digital currency and crypto finance was once preferred because it was not seen as systemic enough, then the boom in stablecoins may have forced a change of course.

(by Mike Dolan, Twitter: @reutersMikeD; edited by Dan Grebler)


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