Stablecoin implosion could be a black swan for US Treasuries

[pmbug]

...
Issuers of those stablecoins say they are backed by real assets such as fiat currency or bonds so that users can redeem their token one-for-one with a real asset.

Tether says that more than 58% of its reserves are held in U.S. Treasury Bills, accounting for around $39.7 billion. Circle, the company behind USDC, has around $12.7 billion worth of Treasurys in its reserve. Paxos, which issues BUSD, said it has around $6 billion of U.S. Treasury bills. All those figures are from the companies' latest reports which were issued in November.

But while there are no signs of major stablecoins collapsing, Eswar Prasad, an economics professor at Cornell University, said it's something regulators he's spoken to are worried about because of the impact it could have on traditional financial markets. That's because a potential run on a stablecoin — where large swathes of users look to redeem their digital currency for fiat — would mean the issuer has to sell off the assets in their reserve. That could mean dumping large amounts of U.S. Treasurys.
...
The academic warned that if such a run were to occur when bond market sentiment was "very fragile as it is in the U.S. right now," there could be a "multiplier effect" thanks to large selling pressure on Treasurys.

"If you have a large wave of redemptions that can really hurt liquidity in that market," Prasad said.
...

A stablecoin collapse could spill into the U.S. bond market and economy, professor warns

While there are no signs of major stablecoins collapsing, an economics professor at Cornell University says it's something regulators are worried about.

www.cnbc.com

 

[Goldhedge]

the more I learn about the digital coin space the more I'm happy I didn't jump into the tulip patch.

 

[pmbug]

Stablecoins are supposed to maintain assets to peg their value. Stablecoins pegged to the dollar supposedly have large holdings of Treasuries. If they implode, they could be forced to dump their holdings. It's an issue specific to stablecoins.

 

[pmbug]

Maybe these will be different...

National Australia Bank (NAB), one of Australia’s ‘Big 4’ banks, is preparing to launch an Australian dollar-pegged stablecoin on the Ethereum network, becoming the second bank in the country to do so.

According to a report from the Australian Financial Review (AFR), the bank’s AUDN stablecoin will be launched in mid-2023 and is designed to streamline cross-border remittances and carbon credit trading. The new stablecoin will be fully backed one-for-one by Australian fiat money that will be held in trust at the bank.

Back in March of 2022, Melbourne-based ANZ bank announced the creation of a similar product, known as A$DC, becoming the first bank in the country to create its own stablecoin.

The move by individual banks to create their own stablecoins follows a failed attempt by the big four banks to create an industry-wide Australian dollar stablecoin in early 2022. That effort ultimately failed due to competition concerns and banks being at different stages in their crypto strategy, the AFR said.

Howard Silby, the chief innovation officer for NAB, said the bank’s decision to mint the AUDN stablecoin was based on its belief that blockchain technology will play a crucial part in the evolution of financial services.
...

National Australia Bank to launch AUDN, an Australian dollar-pegged stablecoin

National Australia Bank (NAB), one of Australia’s “Big 4” banks, is preparing to launch an Australian dollar-pegged stablecoin on the Ethereum network in mid-2023.

www.kitco.com

First there were coins, but they were too unwieldy
So paper bills became claims on the coinage, but they were not convenient enough for the digital age
So crypto stablecoins became claims on the paper bills, but ....
So ...

 

[pmbug]

The Innovation Hub of the Bank of International Settlements (BIS) unveiled their 2023 priorities, and among the ongoing projects exploring central bank digital currencies (CBDC), cybersecurity, and data monitoring, they announced a new initiative focused on stablecoins.

Pyxtrial is a new project based at the Innovation Hub’s London Centre which aims to “enable systemic monitoring of stablecoins.” ...
...
The goal of Pyxtrial is to develop a technology platform that can help to monitor stablecoin's balance sheets. “Most central banks lack tools to systemically monitor stablecoins and avoid asset-liability mismatches,” they wrote. “[Pyxtrial] will investigate various technological tools that may help supervisors and regulators to build policy frameworks based on integrated data.”

The Innovation Hub is also developing tools for monitoring cryptocurrencies and decentralized finance (DeFi) in real time. The Atlas project is an information platform designed to address the lack of vetted data that makes it difficult to assess the economic potential of these markets.
...

BIS launches new stablecoin project, crypto and DeFi monitoring platform

(Kitco News) - The Innovation Hub of the Bank of International Settlements (BIS) unveiled their 2023 priorities, and among the ongoing projects exploring central bank digital currencies (CBDC), cybersecurity, and data monitoring, they announced a new initiative focused on stablecoins.

www.kitco.com

 

[pmbug]

The U.S. Securities and Exchange Commission could be gearing up to take action against Paxos, a company that issues a type of cryptocurrency called stablecoin.
...
Paxos issued a digital currency called Binance USD or BUSD ...
...
Last week, New York state's financial regulator ordered Paxos to stop issuing BUSD.

Separately, Paxos said that the SEC had issued it a notice that the regulator is considering recommending an action alleging that BUSD is a security. Paxos said the notice suggests Paxos should have registered the offering of BUSD under federal securities laws.

The SEC hasn't started official action. But the agency's actions are being watched closely because if it starts an official procedure, it could have huge implications for all stablecoins including Tether and USDC, the two largest which combined are worth $110 billion.

"If the SEC charges Paxos, any other issuer of stablecoins should register or prepare for a court fight with the SEC," Renato Mariotti, a partner at law firm BCLP, told CNBC.
...

The SEC has a stablecoin firm in its sights — and it could shake up the whole $137 billion market

The U.S. Securities and Exchange Commission (SEC) could be gearing up to take action against Paxos, over the issue of whether Binance USD (BUSD) is a security.

www.cnbc.com

 

[Voodoo]

Stablecoins are supposed to maintain assets to peg their value. Stablecoins pegged to the dollar supposedly have large holdings of Treasuries. If they implode, they could be forced to dump their holdings. It's an issue specific to stablecoins.

The problem lies in the other way around. At least for our entire economy. ALLOWING debt instruments (ie Treasuries) to be used as money (collateral) is a huge problem. This is another reason why raising interest rates (treasury values decline) is such a big problem.

Tether would be fine (at least from $EC interference) because they were created by the banker scum. Just taking out some competition, nothing to see here.

 

[searcher]

Feb 21 (Reuters) - The world of stablecoins is suddenly looking shaky.

Seismic shifts may be afoot in the $137 billion market after New York-based Paxos Trust Company, which mints Binance's stablecoin, said it would cease issuing new BUSD tokens after U.S. regulators labeled the asset an unregistered security.

Cryptoverse: Tether tightens grip on wobbling world of stablecoins

Seismic shifts may be afoot in the $137 billion market after Paxos Trust Company, which mints Binance's stablecoin, said it would cease issuing new BUSD tokens.

www.reuters.com

 

[pmbug]

A tale of two stablecoins...

Binance USD Stablecoin Market Cap Falls Below $10B After Coinbase Delisting

Liquidity is deteriorating for Binance USD as crypto investors have redeemed some $7 billion of tokens from issuer Paxos since regulators ramped up pressure on the stablecoin.

www.coindesk.com

Stablecoin Issuer Tether Used Bank Accounts Opened With Falsified Documents in Past: WSJ

Tether, the company behind the world's largest stablecoin, accessed bank accounts by way of falsified documents and intermediaries, a new report says.

www.coindesk.com

 

[pmbug]

Cross posting from the SVB thread:

 

[pmbug]

Stablecoins are already providing access to U.S. dollars for many in the developing world and distressed economies, but they could become a regular tool for payments and transactions in the United States in the future, according to Nevin Freeman, co-founder of stablecoin platform Reserve.
...
“People for the most part use stablecoins as part of speculative trading activities these days, but we do start to see stablecoins being used more and more for ordinary transactions and savings in economies where access to US dollars is attractive and not necessarily easy to get,” he said.

He said that when he talks to people in the United States about cryptocurrency and stablecoins, nobody is interested in using them as a regular form of payment, but in economies that have undergone hyperinflation or have other limitations such as capital controls, stablecoins represent a way to access U.S. dollars.

“It’s not really the case that we come across a whole lot of people who are especially excited to use crypto as money,” he said. “But we do come across a lot of people who are especially excited to use the US dollar as their currency of choice, and stablecoins often present a novel way to do that. It's really the desire for dollars that is driving the usage of stablecoins in economies that have currency issues.”
...
Freeman also shared his thoughts about the recent draft stablecoin bill which caught the industry by surprise ahead of last week’s Congressional hearing on stablecoins and CBDC development.
...
Freeman said he’s very pleased to see that the U.S. government is moving towards legitimization of dollar-backed stablecoins rather than outlawing them or requiring that they only be issued by the state.

“I think it's a pretty clear signal to the market that privately-issued U.S. dollar stablecoins are here to stay in the United States.”

Congress' draft bill is a 'clear signal' that U.S. dollar stablecoins are 'here to stay' - Nevin Freeman, co-founder of Reserve

(Kitco News) - Stablecoins are already providing access to U.S. dollars for many in the developing world and distressed economies, but they could become a regular tool for payments and transactions in the United States in the future, according to Nevin Freeman, co-founder of stablecoin platform...

www.kitco.com

Having crypto on ramps means people have instant forex access to dollars (via stablecoins). Even if the stablecoins aren't legal tender for the economy (like Zimbabwe has done with the dollar [and gold] or El Salvador has done with Bitcoin), it's still an opportunity for transferring local currency into dollars sans government controlled exchanges via a very liquid crypto market.

 

[pmbug]

Also... The OP was prescient to consider the potential impact of stablecoin implosions, but missed the boat in identifying banks as the dominos that would fall (redeeming treasuries to cover large volumes of unsecured cash deposits that were facing redemptions):

Crypto did not cause Signature, Silvergate and SVB collapses

A new report from the Congressional Research Service (CRS) showed that crypto losses did not cause the collapses of Silicon Valley Bank and Signature Bank, or even Silvergate, but fear of crypto exposure was the driving force behind the bank runs. The CRS, a non-partisan agency which acts as a...

www.pmbug.com

 

[searcher]

From the link:

The Republican chair of the House Financial Services Committee has released a new draft of the leading U.S. legislative proposal for overseeing stablecoins, and it includes some of the positions of Democratic lawmakers.

The bill posted Thursday is still just a draft, meant to be further discussed at a June 13 committee hearing, but it marks another potential move toward a bipartisan negotiation on the legislation that many believe could be the easiest way to take a first step toward U.S. regulation of crypto.

New Stablecoin Bill Drafted by House Republicans as Compromise With Democrats

The House Financial Services Committee has released this year’s third draft of a stablecoin bill, meant to combine ideas from both parties in advance of a hearing next week.

www.coindesk.com

 

[pmbug]

I tried skimming through the draft, but it is 42 pages long and I quit after about 10 pages.

 

[searcher]

BIS launches new stablecoin project, crypto and DeFi monitoring platform

(Kitco News) - The Innovation Hub of the Bank of International Settlements (BIS) unveiled their 2023 priorities, and among the ongoing projects exploring central bank digital currencies (CBDC), cybersecurity, and data monitoring, they announced a new initiative focused on stablecoins.

www.kitco.com

Update

Project Pyxtrial: monitoring the backing of stablecoins

Project Pyxtrial is the latest project from the BIS Innovation Hub London Centre that is exploring technology solutions to enable the monitoring of balance sheets of asset-backed stablecoins.

www.bis.org