The stablecoin market has been growing exponentially, and last week, Eric Rosengren — president of the Federal Reserve Bank of Boston — appeared to raise a cautionary flag.
“There are many reasons to think that stablecoins — at least, many of the stablecoins — are not actually particularly stable,” he said in remarks before the Official Monetary and Financial Institutions Forum, voicing concerns that “a future [financial] crisis could easily be triggered as these become a more important sector of the financial market, unless we start regulating them.”
Moreover, in an accompanying slide presentation, the bank CEO referenced Tether (USDT), the dominant stablecoin issuer, noting that its basket of reserve assets looks very much like a “very risky prime fund” — the sort that got into trouble in the last two recessions.
Was Rosengren right to call out Tether by name for its reserve assets, which include commercial paper, corporate bonds, secured loans and precious metals? Could the parabolic growth of stablecoins truly destabilize short-term credit markets, and would the stablecoin sector be better served by more rigorous reserving and auditing?
Also, given that Tether by far remains the dominant player in the global stablecoin market, what would happen if it falters — could it bring down the larger crypto market along with it? As the chart below used in Rosengren’s presentation shows, stablecoin market capitalization relative to prime money market mutual funds under management now exceeds 20%.
Francine McKenna, adjunct professor at American University’s Kogod School of Business, understands Rosengren’s concern. She told Cointelegraph that these new stablecoin funds are, in a sense, “interlopers” in the traditional short-term credit markets and that the Boston Fed president and his peers could be realizing that “suddenly we don’t have our fingers on all the levers.”
Stablecoins run the crypto market?
Stablecoins are affecting short-term credit prices now, but these instruments could just as quickly exit the market. In mid-June, a “run” on the Iron Finance protocol, for instance, caused the price of its IRON stablecoin to move off peg and crushed its native token, TITAN, by almost 100%, impacting investor Mark Cuban among others.
Rohan Grey, assistant professor at Willamette University College of Law, told Cointelegraph that if Tether collapses, it could have dire effects on the cryptoverse:
“Tether is still one of the most widely traded asset pairs for almost every other crypto, and provides a huge amount of liquidity to the sector. So yes, a crash in Tether would have significant knock-on effects for the rest of the ecosystem.”
Circle and a few other stablecoins have begun to take market share from Tether, “So it’s definitely possible that some other stablecoin will step into the breach, but even without Tether, the rest of the crypto industry remains built on a foundation of stablecoins,” he added.
Controversy has dogged USDT through much of its short history, and in February, Tether and its Bitfinex affiliate agreed to pay the state of New York $18.5 million for misrepresenting the degree to which USDT was backed by fiat collateral.
“Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,” said New York State Attorney General Letitia James when announcing the settlement, which also requires Tether and Bitfinex to submit mandatory quarterly reports on USDT reserves — the first of which was summarized in Rosengren’s slide deck.
Not all were reassured by the March USDT report, however. The fact that commercial paper accounted for half (49.6%) of assets was a particular eyebrow-raiser. “The fact that Tether is holding so much corporate paper and corporate bonds is a huge issue,” Grey told Cointelegraph, adding: “No one knows what it is, and it’s completely at odds with their claim for years that they were only…