The stablecoin market is growing exponentially, and last week, the President of the Federal Reserve Bank of Boston, Eric Rosengren, appeared to raise the warning flag.
“There are many reasons to think that stablecoins – at least, many stablecoins – are not actually particularly stable,” he said. comment Before the official currency and financial institution forum, expressed their opinions on the “future [financial] Unless we start to regulate them, as they become a more important part of the financial market, they can easily trigger crises. ”
In addition, in the accompanying slide presentation, the bank CEO mentioned Tether (USDT), a major stablecoin issuer, and pointed out that its reserve asset basket looks very much like a “very risky major fund”-a fund that has been in trouble during the past two recessions.
Does Rosengren have the right to name Tether for its reserve assets (including commercial paper, corporate bonds, secured loans, and precious metals)? Will the parabolic growth of stablecoins really undermine the stability of the short-term credit market? Will stricter reserves and audits better serve the stablecoin industry?
In addition, given that Tether is still the dominant player in the global stablecoin market so far, what will happen if it falters-will it simultaneously pull down the larger crypto market? As shown in the chart used in Rosengren’s speech below, the market value of stablecoins is now more than 20% relative to managed high-quality money market mutual funds.
Francine McKenna, an adjunct professor at American University’s Cogold School of Business, understands Rosengren’s concerns. She told Cointelegraph that, in a sense, these new stablecoin funds are “intruders” in the traditional short-term credit market, and the chairman of the Boston Fed and his colleagues may realize that “suddenly we can’t control all the leverage. “
Stablecoins run the crypto market?
Stablecoins are now affecting short-term credit prices, but these instruments may also exit the market quickly. For example, in mid-June, the “run” of the Iron Finance agreement, Causes the price of its IRON stablecoin to be decoupled from the peg And crushed its native token TITAN by nearly 100%, Influence investor Mark Cuban among them.
Rohan Grey, assistant professor at Willamette University School of Law, told Cointelegraph that if Tether crashes, it could have a terrible impact on the crypto world:
“For almost all other cryptocurrencies, Tether is still one of the most widely traded asset pairs and provides a lot of liquidity to the industry. So yes, the collapse of Tether will have a major chain effect on other parts of the ecosystem reaction.”
Circle and some other stablecoins have begun to take market share from Tether. “Therefore, some other stablecoins are definitely likely to enter a breakthrough, but even without Tether, other cryptocurrency industries are still based on stablecoins,” he added. Up.
In the short history of USDT, controversy has plagued it. In February, Tether and its Bitfinex affiliate agreed $18.5 million paid to New York State Distorting the extent to which USDT is backed by legal collateral.
“Tether’s claim that its virtual currency is always fully backed by the U.S. dollar is a lie,” Say When New York State’s Attorney General Letitia James announced the settlement agreement, he also required Tether and Bitfinex to submit mandatory quarterly reports on USDT reserves—the first of which was to sum up On Rosengren’s slide deck.
However, not everyone is at ease with the March USDT report. Commercial paper accounts for half of assets (49.6%) is a particularly striking fact. “The fact that Tether holds so many corporate bills and corporate bonds is a huge problem,” Gray told Cointelegraph, adding: “No one knows what it is. It’s the same as they claimed for years that they only invest in cash or similar. Cash assets.”
McKenna explained to Cointelegraph that “cash equivalents” must be particularly “liquid and free from market uncertainty”: “Commercial paper is not universal. There are various commercial papers.” She said that it is not like what people said in the past. GE’s commercial paper is “as good as gold.” Today, “You have to see who the issuer is.”
“USDT has been a big question mark since its inception,” Sidharth Sogani, founder and CEO of research firm Crebaco, told Cointelegraph. If Tether invests assets in assets other than the U.S. dollar, what happens if the prices of these assets (such as precious metals or corporate bonds) fall? “Will USDT depreciate?” In addition, how will the income be distributed? Sogani said that Tether users may have bonds and commodities that support stablecoins, “so the interest earned is the user’s right.”
However, not everyone has a problem with Tether linking its token to a basket containing commercial paper. Sean Stein Smith, Assistant Professor in the Department of Economics, said: “In my opinion, stablecoins (whether USDT or not) are held or backed by commercial paper, rather than being 100% backed by a specific legal currency. There is nothing wrong with the business of Lehman College, told Cointelegraph.
In other words, Stan Smith admits that there may be potential “complications”-for example, the “operation” of stablecoins may destabilize certain parts of the commercial paper market. Or conversely, if the commercial paper market “stagnates,” it may undermine the redemption of that particular stablecoin.
Will the regular audit of Tether reserves by the Big Four accounting firms improve its position on the issue of “support”? “Regular audits will definitely help,” Stein Smith said. “It can both increase people’s confidence in USDT support and create specific encryption standards that can be adopted by other stablecoin issuers.”
But others are not sure. Dollar coin (USDC), for example, the second largest stablecoin, Grant Thornton LLP confirmed that it has enough USD reserves every month. This is generally considered a better approach, but in McKenna’s view, even this has serious limitations. McKenna explained that all that really happened was the monthly verification of the issuer’s bank balance. Two minutes after the auditor checks the bank statement, the stablecoin issuer can simply transfer the funds elsewhere.
What is the answer? According to McKenna, it is an escrow account-that is, “an independent client’s funds like a broker/dealer must have it.” In any case, “there are many ways to tie up money and make it immobile.”
Elsewhere, another sticking point is that, according to Tether itself, only 2.9% of USDT’s asset backing is cash. This has led some people to say that Tether is like a bank-but not subject to strict bank supervision.
“Obviously, from the perspective of the composition of reserves-a small part of the reserves is cash in bank accounts-Tether operates like a bank, but does not make normal disclosures,” Martin Walker, director of banking and finance at the Evidence-Based Management Center, tell Financial Times.
At the same time, all the publicity about reserves may not help stablecoins attract new users.According to the data of CoinMarketCap, the market value of USDT is almost nothing concession In the past month. For USD-backed stablecoins, the market capitalization is a good representative of the total supply, because each currency is very close to $1.00. At the same time, during this period, the market capitalization of Tether’s closest competitors, USD Coin and Binance USD (BUSD), have both increased significantly. 10% with 12%, Respectively since the beginning of June.
Cointelegraph invited Tether/Bitfinex to comment on the idea that it appears to be losing to a competitor but has not received a response.
What if USDT is shaken?
There is no sign that USDT is about to collapse, but given that Tether continues to dominate the market, such incidents are usually a topic-as a guess. Sogani told Cointelegraph:
“Bitcoin/cryptocurrency pairs will continue to exist, but there will still be massacres. I believe the market will lose 10% to 15% of its market value-the current circulating supply of USDT is $64 billion-if USDT collapses, it may be There was a sudden pullback of up to 35% because it would cause panic.”
In contrast, Stein Smith disagrees that stablecoins (especially USDT) pose a great threat to financial stability or the crypto ecosystem. “If stablecoins do pose a global systemic risk, then why are so many central banks experimenting with and deploying central bank digital currencies — this is a stablecoin issued by the grassroots government,” he said, adding:
“If Tether crashes, there will definitely be some volatility and headlines heralding the’end of encryption’, but it will not crash the entire industry.”
Need a stabilization bill?
Elsewhere, stablecoin regulation may come, at least if certain initiatives prove to be successful. “The important thing is that when stablecoins linked to fiat currencies are issued, they are regulated,” Sogani said. “Otherwise, it’s like creating value out of thin air. Continue to buy more cryptocurrencies, especially Bitcoin. In most cases it is centralized, and due to lack of transparency, strict regulations must be formulated.”
The stablecoin market is also very scattered around the world, because different organizations have their own stablecoins, and many stablecoins can be used on multiple chains. For example, USDT can be used as ERC-20 tokens on Ethereum, TRC-20 tokens on Tron, and BEP-20 tokens on Binance Smart Chain, and can also be used through the Omni layer on Bitcoin (Bitcoin), which makes auditing more difficult.
“Stablecoins are essentially an unregulated free banking business that issues deposits. However, free banking has never worked in the past, even when the government needs support,” said Gary Gorton, professor of finance at Yale University. Present And his view, “Stablecoins need reliable support because they can now operate without any physical supervision.”
“The industry can profit from more regulation,” Gray of Willamette University told Cointelegraph.Gray helped draft the stablecoin network sharing and bank licensing enforcement (STABLE) bill, which is Introduction Held in the U.S. House of Representatives in December 2020. Among other things, the Stability Act will require US stablecoin issuers to obtain a banking license and obtain prior approval from the Federal Reserve, the Federal Deposit Insurance Corporation, and appropriate banking institutions within their jurisdiction.
All in all, stablecoins have exploded recently and have received more attention from financial regulators. McKenna said that Tether is at the top of the stablecoin pyramid, but whether all legal currency-based stablecoins are truly one-to-one pegged is still questionable. “If I need cash to redeem or pay taxes, will I get a dollar for a dollar?”
After all, when money market funds “bankrupted” during the 2008 financial crisis—that is, when their net asset value fell below $1—it was because these funds invested in derivatives, commercial paper, and other assets that were suddenly illiquid. . McKenna concluded: “Yes, the Fed and its president have many reasons to be concerned.”