Stablecoins, for now, are not connected in this way. Unlike the dot-com meltdown, which was confined to equities markets, the French fund’s problems implicated assets that were core pieces of the banking system, which triggered a devastating financial panic. stock market wealth-an amount more than 50 times bigger than the stablecoin market-but that did not trigger systemic financial uncertainty.Ĭonversely, a weakening housing market in 2007 turned into a full-blown financial crisis when a $2.2 billion French fund no one had ever heard of, with a third of its assets in highly rated subprime bonds, suspended redemptions and touched off a run on all financial institutions and the highly rated assets they were using as collateral. But while stablecoins backed by non-cash assets might be more prone to losses, that’s not the same as broader financial instability.Ĭonsider the dot-com bust at the beginning of the century, which wiped out $8 trillion in U.S. The fallout of a run, say the authors, would be much worse if the issuer’s reserves contain non-cash assets such as commercial paper-a practice engaged in by some issuers, including Tether, since it lets them make more money on the reserves. The financial stability risks of a stablecoin run would be greater in the context of stablecoins backed by potentially volatile and illiquid assets than in the context of stablecoins backed one-for-one by high quality liquid assets. Here’s the statement, which addresses the potential risk of a “run” on stablecoins, and how that might affect the broader financial markets: Instead, it contained only one definitive statement-a statement that happens to be precisely backwards. The report, from a President Biden working group that includes Treasury Secretary Janet Yellen and Fed Chair Jerome Powell, dropped earlier this month and was expected to provide clarity on how stablecoin issuers like Tether and Circle should back their tokens.
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