How “stablecoins” risk destabilizing global markets

How "stablecoins" risk destabilizing global markets

The Biden administration, the Federal Reserve, and the Financial Stability Board have recently raised concerns about “stablecoins,” suggesting that these unique cryptocurrencies could pose a major risk to global financial stability.

After Bitcoin and Libra – the dead digital currency when Facebook arrived – global financial regulators have a new enemy: stablecoins. The Financial Stability Board (FSB) specifically targeted these cryptocurrencies in its report on tthe dangers of crypto assetspublished on February 16.

Stablecoin growth continued through 2021 “despite concerns about regulatory compliance, quality and sufficiency of reserve assets, and risk management and governance standards,” the global organization wrote. , created by the G20 in 2009. Now, he says, they are about to endanger global financial stability.

Stability in an unstable world?

The status of stablecoins as the villain of the financial world may seem surprising for an electronic currency originally created to “curb the volatility of Bitcoin and precisely bring a little stability in this sphere”, Nathalie Janson, economist and specialist in cryptocurrencies at Neoma Business School, told FRANCE 24.

Stablecoins are cryptocurrencies that hardly ever vary in price because they are pegged to a base benchmark such as the US dollar. For example, a Tether – the most famous and widely used of all stablecoins – always has a value equal to one US dollar.

This promise of stability has made stablecoins, and especially tethers, “the bridge between paper currencies (such as the dollar, euro, yuan, etc.) and cryptocurrencies”, Vincent Boy told FRANCE , financial analyst and cryptocurrency expert at the consulting firm IG. 24.

Essentially, Bitcoin and Ethereum (another cryptocurrency) investors avoid yo-yo prices by exchanging their currencies for Tethers, USD coins, or binance USD – all types of stablecoins – in order to find out the value exact dollars from their wallet. Some platforms even require users to first transfer their cryptocurrency to stablecoins before converting them to dollars or other traditional currencies.

To guarantee their value, the creators of “stable” cryptocurrencies must always keep in reserve the same amount of dollars as the number of stablecoins in circulation. For example, in December 2021, the founders of Tether said they had $78.2 million in the bank to cover the 78 million coins in circulation.

“Systemic risk” on the horizon?

This means that “today’s tethers have a market value similar to that of a bank,” Boy said. This is the result of a lightning-fast increase in value: in December 2021, the market value of all stablecoins was around 157 billion euros, “an increase from the 5.6 billion early 2020,” according to the FBS.

The increases in value of Tethers in particular have caused a cold sweat among financial authorities around the world. In the United States, the Federal Reserve discussed the threat of stablecoins at a meeting in August 2021. “The questions posed are how to be sure that [the creators] really have the necessary reserves and if Tether is about to fail,” Boy said.

The growing stature of stablecoins is one of the main signs of the “democratization of cryptocurrency investing,” Boy said. The more people who want to exchange dollars for Bitcoins, Monero and others, the more the volume of transactions increases and the more stablecoins there are. there are some in circulation.

It follows that it’s no longer just insiders who own Tethers and other stablecoins, “but also traditional investment funds, corporations, and even banks,” Janson said. This is what the FSB has described as “the growing interconnection of stablecoins with the mainstream financial system.” .

If these stablecoins were to fail, it would initially mean financial losses for stock market investors, which could lead to wider impacts on traditional financial markets, as feared by the FSB and the US Federal Reserve.

For now, the risk is relative. “The financial leverage of stablecoins is significant, but central banks have the ability to cover losses if something goes wrong without hurting their balance sheets too much,” Boy said.

However, if Tether and other stablecoins continue to grow at the same rate as in recent years, they could “reach systemic size, which means they have become ‘too big to fail,'” he added. .

Transparency and crystal balls

As long as the creators of stablecoins have sufficient reserves, there is no risk of failure. But this is another aspect that worries financial authorities: “Stablecoin issuers are not subject to a consistent set of standards regarding the composition of reserve assets…and there is a lack of consistency in trading practices. disclosure,” the FSB warned.

Currently, the FSB has to take the promises of these stablecoin creators at face value, because the audits of their reserves – when they are done – are not necessarily done by leading organizations or according to international standards. Just three years ago, Tether was widely suspected to be just one big scam — not reassuring for a cryptocurrency now at the heart of an entire financial ecosystem.

However, stablecoins have made efforts towards transparency. “What we know now is that they not only have dollar reserves but also short-term investments that allow them to make payments,” Janson said.

But that remains a problem. “The authorities are obsessed with the idea of ​​a new liquidity crisis, like the one that occurred in 2008,” she added. In the era of subprime mortgages, when the market realized that the financial products offered by Lehman Brothers and others were partly based on worthless assets, no one hesitated to touch them, plunging the banks into a deep financial crisis. .

What would happen if the same scenario happened with stablecoins that are not 100% transparent about their reserves? “For example, some stablecoins may be tied to Evergrand’s debt [the Chinese real-estate giant verging on failure], as has been suggested for Tether. In this case, the reserves could have a much lower value, which could make it impossible to reimburse everyone if necessary,” Boy said.

Hence the calls from the FSB and the Federal Reserve to regulate stablecoins and subject them to similar obligations to banks. US President Joe Biden has also called for tougher controls.

But for Janson, such measures would go too far. She suspects the authorities want to set up roadblocks to prevent stablecoins from competing with national cryptocurrencies currently being developed in many countries. She said, “Why would we want to treat them like banks? It would suffice to impose stricter transparency obligations, because that is the main problem.

This article has been translated from the original in French.