Cornell professor warns of US bond market disruption from possible collapse of major stablecoin – Economics

A Cornell University professor has warned of the potential impact a collapse of a major stablecoin could have on the US bond market. Eswar Prasad said if major stablecoins face a collapse, the number of treasuries they would have to sell could disrupt the U.S. Treasury market and influence prices.

Cornell Professor Warns of Stablecoin Crash Danger

Eswar Prasad, an economics professor at Cornell University, has warned of the potential damage that a bank run could have on the traditional financial system in the US in the event of a possible collapse of a major stablecoin. Although the recent collapse of the crypto economy did not reach legacy financial structures, Prasad believes that stablecoins and their operations pose risks in this regard.

In an interview with CNBC, Prasad argued that stablecoins use US Treasuries as a backup to maintain the value of the peg. In the event that one of the major stablecoins in the market faces a collapse or bank run, these entities would have to repay these bonds to settle their own repayments, which would impact the Treasuries market.

Prasad explained:

A large volume of redemptions, even in a fairly liquid market, can cause turbulence in the underlying securities market. Given the importance that the Treasury bond market has to the broader financial system in the U.S., I think regulators are right to be concerned.

According to their report, all three leading stablecoins hold a large number of US bonds in their treasuries. According to reports published in November, Circle, Tether and Paxos, issuers of the three main stablecoins in the crypto market, would own almost $60 billion in US treasuries.

Incoming regulation

While a clear regulatory framework for stablecoins has not yet been created in the US to address potential problems with their collapse, regulation could be on the horizon. In December, Republican Senator Pat Toomey introduced the “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022,” also known as the TRUST Act, aimed at regulating stablecoin operations without hindering innovation.

Also recently the US House of Representatives Committee on Financial Services created the “first” subcommittee on Digital Assets, Financial Technology and Inclusion, with the intention of providing clear rules for the digital cryptocurrency ecosystem, which could also include stablecoins in the future.

The stablecoin market was rocked in 2022 when one of the top five algorithmic stablecoins, UST, collapsed and went from a capitalization of around $10 billion in January to just $215 million in December.

What are your thoughts on concerns about the impact of a stablecoin bank run on the US bond market? Tell us in the comments section below.

Sergio Goschenko

Sergio is a cryptocurrency journalist based in Venezuela. He describes himself as late to the game, entering the cryptosphere when the price surge occurred in December 2017. He has a background as a computer engineer, lives in Venezuela and is affected by the cryptocurrency boom on a social level. He offers a different perspective on crypto success and how it helps the unbanked and underserved.

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