Stablecoins are already a $308 billion market that some say could reach $1 trillion by the end of this decade.
But for the European Union’s Systemic Risk Board, the booming market poses real risks for both cryptocurrencies and traditional finance.
In a report this month, the ESRB called for strengthening EU cryptoasset markets, or MiCA, regulations against stablecoins that do not comply with standards used by investors in the region.
The report says such measures are necessary to protect the eurozone from disorderly capital outflows from the region’s financial markets.
The liquidity underpinning stablecoins could negatively impact bond markets during an extreme panic. This is because most of the reserves held by large stablecoin issuers, such as Tether and Circle, are deposited in short-term US Treasury bills.
There are approximately $129 billion in bonds backing USDT ($1.00) and USDC ($1.00), respectively.
The report warned that stress scenarios could trigger a bank run and cause massive dumping of these reserve assets.
During the Covid-19 pandemic of 2020, funding markets froze and investors rushed to sell commercial paper and Treasury bonds in the next market.
The rush temporarily pushed up short-term yields as those assets quickly became illiquid, until the Federal Reserve stepped in with an emergency liquidity injection.
The episode exposed how quickly supposedly safe, cash-like assets such as commercial paper and Treasury bonds can become illiquid during periods of market stress.
For the ESRB, the fear is not the next cryptocurrency crash, but who is affected when the market tries to sell its way out of one.
Outside the EU there are similar concerns.
Stablecoin flight
Standard Chartered recently predicted that stablecoins could trigger a capital flight of up to $1 trillion from emerging markets over the next three years.
The US Treasury Department also estimates that stablecoins could lead to an outflow of US deposits of $6.6 trillion as users seek higher yields.
Other policymakers say those fears are overblown.
On Monday, Jonathan Gould, the US Comptroller of the Currency, said that a large-scale capital flight would not happen overnight and that bank officials and financial regulators would intervene in a large-scale bank run.
In September, Faryar Shirzad, chief policy officer at Coinbase, dismissed links between the growth of stablecoins and the erosion of bank deposits, calling it “a myth.”
Still, the EU systemic risk board report says stablecoins may threaten the region’s digital finance ambitions.
The report states that the global dominance of dollar-pegged stablecoins issued by companies like Tether that operate outside the eurozone raises concerns about monetary sovereignty.
Tether is the issuer behind USDT, a stablecoin pegged to the US dollar.
USDT accounts for nearly 60% of stablecoins in circulation, and Tether also launched its own blockchain, Plasma, to grow its stablecoin market.
Osato Avan-Nomayo is our DeFi correspondent based in Nigeria. Covers DeFi and technology. Do you have advice? Please contact him at [email protected].
