The instability in stablecoins unnerving regulators

But the explosive issuance of stable coins, which have grown 18 times during the pandemic to more than $ 100 billion, is a completely different matter, and they have been causing alarm all year.

Stable coins are, in fact, cryptocurrencies, verified in decentralized public ledgers or blockchains, but designed to have a stable value relative to hard currency or gold, in order to avoid such volatility that makes bitcoin and other tokens almost impossible for most commercial transactions.

Although they operate independently of traditional banking systems, it is the assets that they use to theoretically link their value that lead them to the real world-like a science-fiction portal from the “inverted” world of cryptography to the material world, for which watchdogs are paid to worry about.

Regardless of whether it will eventually be used for online payments or just to lubricate the wheels of the so-called decentralized financing of crypto-credit markets, two main tokens still dominate the stablecoin universe: Tether and the US dollar coin.

One Facebook-backed Diem, formerly known as Libra, is another one in the works. But it has not yet been launched in the conditions of intensive government control and counteraction to its potential scale and systemic risks.

However, launched in 2014, Tether already accounts for more than 60 percent of the total $ 100 billion currently issued.

One one-to-one pegging with the dollar is what he is using as reserves to fulfill the promised one-to-one pegging with the dollar is what worries regulators. This is not only cash in dollars, as many might assume, but also a mixture of commercial securities, bills, bonds and loans.

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

The rating agency Fitch warned this month that the rapid growth of stable coins could have a destabilizing effect on short-term credit markets, although it acknowledged that models differ, and the US dollar coin – more than 20 percent of the stable coin complex-provides a peg to the dollar in cash in storage accounts.

“The potential risks of asset contamination associated with the liquidation of stablecoin reserve assets may increase the pressure to tighten regulation of the nascent sector,” the report says, adding that Tether’s CP assets may be larger than those of most US or European primary money market funds.

“A sudden mass repayment of USDT (Tether) may affect the stability of short-term credit markets if it occurs during a period of stronger pressure from sellers in the CP market, especially if it is associated with a wider repayment of other stable coins that contain reserves in similar assets,” Fitch said, noting the break in the binding of secured stable coins last month.

UNTETHERED

At least, this is what the Federal Reserve System is focused on.

At the end of last month, the head of the Boston Fed, Eric Rosengren, noted the “exponential” growth of stable coins and potential problems associated with the reserve balance behind Tether.

“In fact, this is a very risky core fund,” Rosengren said at the OMFIF Financial Stability conference, stressing that US primary money market funds will not be allowed to own many of these assets, such as longer-term securities or precious metals.

“A stable coin with such a characteristic… it will not be stable at a time when we see a significant reduction in spreads, ” Rosengren added, noting that fixed assets have faced difficulties in the last two recessions.

“There is a problem of financial stability as they grow, and we need to study regulation and what is being sold to the general public,” he said.

Paying more attention to any expansion of the use of stable coins as payments, as in the case of Diem, the Bank of England insists that they should be regulated in the same way as the money of commercial banks, and have equivalent capital and liquidity rules, as well as offer deposit insurance.

When transferring plans from Switzerland to the United States in May, Diem said that its planned dollar stable coin will be issued by the California-based Silvergate bank. Silvergate will manage reserves that support IT reserves, according to Fitch, will amount to at least 80% in short-term low-risk government securities and 20% in cash periodically placed in money market funds.

Legislation in the US and Europe regarding stable coins and the management of their reserves has been introduced since the end of last year, and Fitch claims that this can lead to greater transparency and accountability, as well as less risky reserve provision.

But there seems to be no clarity on the progress or timing of any of these steps.

“We believe that the authorities are unlikely to intervene to save the stable coins in the event of a devastating event, partly due to the moral hazard,” Fitch concluded. But he added that ” the authorities may intervene to support dealers and major MMFs if the repayment of stable coins leads to a wider sale of CP or strengthens it, putting pressure on market liquidity and preventing the issuance of new CP.”

If once the approach to digital money and crypto-financing was preferred because it was not considered sufficiently systemic, then the surge of stable coins may have forced a change in tactics.

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