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Stablecoin sees stable foundation shaken – Crypto News

Stablecoins, it turns out, might not be that stable after all. These digital assets, pegged to the value of government-issued currencies, are said to be the safest part of the volatile crypto market. Their supposedly fixed value has made them a cornerstone of the crypto ecosystem.

But stablecoins don’t live up to their bill. Tether, the largest of these tokens with about $82 billion in circulation, briefly lost its peg on Thursday. It fell as low as 95.08 cents before bouncing back.

The decoupling, brief as it may be, should worry the broader market. The size of the stablecoin industry — $180 billion according to the Federal Reserve in March — makes it a source of potential systemic risk.

The argument behind stablecoins rests on the assumption that issuers have the funds available to pay for them, coin holders are all trying to redeem their tokens at the same time. But that’s hardly an ironclad premise.

In the case of Tether, cash and bank deposits accounted for just 5 percent of its assets at the end of December. Treasuries made up about 44 percent, while commercial paper and certificates of deposit accounted for another 30 percent.

If Tether decides to liquidate its $34 billion in government bonds or its $24 billion in corporate bonds to defend the token, it will impact bond yields and the prime money market. Even more worrisome, about 6 percent — or $5 billion — of its reserves are in other investments, including other cryptocurrencies. These could prove more illiquid and difficult to sell during times of stress.

All of this assumes that Tether’s numbers — issued by an accounting firm based in the Cayman Islands — are reliable. Last October, Tether was fined $41 million for allegations that it made misleading claims about dollar reserves from at least June 2016 to February 2019.

Regulators should set clear liquidity rules about what safe assets stablecoin issuers should hold. Requiring detailed, up-to-date reports on the composition of these reserve stocks would provide an indication of where risks lie.

Source: Crypto News Austria

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