Eswar Prasad, an economics professor at Cornell University, has reportedly cautioned the failure of a major stablecoin could have an impact on the U.S. bond market and said that it’s something regulators he’s spoken to are concerned about.
What Happened: “And I think [the] concern of regulators is if there were to be a loss of confidence in stablecoins ... then you could have a wave of redemptions, which will in turn mean that the stablecoin issuers have to redeem their holdings of Treasury securities,” Prasad told CNBC during the Crypto Finance Conference in Switzerland this week.
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Stablecoins are a kind of digital currency that is supposed to be pegged with a fiat currency such as the dollar or the euro.
They form about $145 billion of value out of the $881 billion worth of the entire cryptocurrency market, and hence are significant, the report said.
Tether USDT/USD, USD coin USDC/USD and Binance USD BUSD/USD are some of the biggest stablecoins.
“And a large volume of redemptions even in a fairly liquid market can create turmoil in the underlying securities market. And given how important the Treasury securities market is to the broader financial system in the U.S. ... I think regulators are rightly concerned,” he said.
Multiplier Effect: Prasad, who provides advice to regulators around the world on policy related to cryptocurrencies, has warned that if a run were to occur when bond market sentiment was “very fragile as it is in the U.S. right now,” there could be a “multiplier effect” thanks to large selling pressure on Treasuries.
“If you have a large wave of redemptions that can really hurt liquidity in that market,” he added.
The U.S. Federal Reserve has also warned in a report in May 2022 that “stablecoins remain prone to runs, and many bond and bank loan mutual funds continue to be vulnerable to redemption risks,” the report added.
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