When America’s oldest money market fund “broke the buck” in 2008, it was a pivotal moment in the financial crisis. The Reserve Primary Fund was forced to renege on its promise to give investors back $1 for every share after Lehman Brothers’ landmark bankruptcy. Individual investors soon found that the bank-like stability promised by such funds did not mean bank-like protection. Stricter regulations followed as to which money market funds could be invested in. Something equally existing could happen in the $1.3 trillion crypto market.
Tether, the cryptosphere’s largest stablecoin, briefly broke its one-to-one tie to the US dollar last week. Unlike Bitcoin or other more esoteric crypto assets, stablecoins, as the name suggests, are designed to avoid volatility. Claiming to be backed by real-world assets, they act as a major cog for the crypto market, offering traders a safe place to park their funds between bets on more volatile digital coins. That stability is now in question and the entire crypto market is restless.
Tether fell to 95.11 cents on Thursday before recovering. It says it continued to redeem its tokens at $1 each to those who asked for them (as of Friday, it had more than $4 billion worth of requests). Meanwhile, a smaller stablecoin rival called TerraUSD — which didn’t even claim the safety net of actual reserves, relying instead on an algorithm-driven peg — plummeted in value.
When armchair investors lose their shirts and a few crypto bros see their egos deflated, the reaction can be a shrug. It’s not like there weren’t any warnings. But that underestimates the risks to the real economy from the $180 billion stablecoin market.
If Tether actually has $80 billion in assets to back its 80 billion coins in circulation, it would become one of the largest hedge funds in the world, with almost half of its holdings in US Treasuries and another quarter in corporate bonds. If there is a fire sale of these assets while Tether tries to maintain its dollar peg or faces a wave of redemptions, the sheer size of such moves could make already nervous financial markets even more volatile.
It doesn’t help that there have been stubborn questions about whether Tether’s assets truly fully back its coins, and the related fines from two US watchdogs. Reports indicate that some corporate debt is issued by Chinese companies. Even in the face of last week’s Farrago, the company has adamantly refused to give details of how its seemingly vast reserves are managed, claiming that it boils down to its “secret sauce.” Banks have found, to their own detriment, that distrust only triggers a rush to exit. The faith of crypto’s true believers may yet be tested.
That means politicians need to stop hesitating and heed warnings about stablecoins from central banks like the Federal Reserve, Bank of England, and European Central Bank. Banks only hold a fraction of their assets in liquid reserves to protect the value of deposits. In return, they are strictly regulated. Stablecoins can spark bank-like runs but enjoy the sparse regulation of the cryptosphere. It needs rules from the real world.
Part of the problem is defining what crypto assets are and therefore which authority should have oversight; Stablecoins muddy definitions further. Another problem is the very different attitudes of countries towards crypto: where some see risks, others see rewards. Unless they act together, trading is futile, as the UK regulator found when it rejected Binance, a major crypto exchange now welcomed by France. But turf wars are a distraction when it comes to a $180 billion market with a global reach. The risk of inaction is that financial stability may be threatened by the next, major shake in stablecoins.
Source: Crypto News Austria