Stablecoin investors could be due to a wake-up call

a dozen years ago, during the financial crisis of 2008, the idea came to me that the best way to ensure a financial system in the midst of wild innovations was that investors and supervisory authorities regularly suffer small “alarm calls”. These events, such as the porridge in the Gold Locking History, would only be "hot" enough to hurt, but not so scorching that they caused permanent burns.

Unfortunately, this did not happen before this crisis; Or not to a dimensions that could have pierced the euphoria and complacency of the investors (and supervisory authorities). An interesting question about which you should think about today in view of another wild rush of financial innovations about cryptocurrencies is whether we may still see a version of this golden-off moment at work?

Consider the fascinating history of cryptocurrency called Tether. In recent years, the company Tether, which is controlled by the owners of a crypto exchange called Bitfinex, has spent $ 69 billion in so-called "stable coins"-digital tokens that are bound to other assets such as dollars.

This sum that has grown quickly this year means that Tether is about half of the entire StableCoin universe. And since the coin, it has often been used as a convenient way to transfer digital assets in Fiat currency (and vice versa) and carry out transactions between different platforms. It is often referred to as a reserve currency of the crypto world.

However, his reputation is not as stable as his name suggests. Before February 2019, the company claimed that the token was covered by dollar stocks, which enables it to maintain a one-to-one change of change. At the beginning of this year, however, the group paid a fine of $ 18.5 million to the New York General Prosecutor's office as part of a comparison, after the AG claimed that Tether had "devoted the true risk for investors" before February 2019.

The company has added a note on its website that the token is covered by safe, dollar-like assets such as $ 30 billion in US commercial papers (an assertion that indicates that it is the seventh-largest global operator in this sector).

Last week, a Bloomberg article claimed that part of Tether's assets in Chinese bonds was in the middle of unusual financial currents between offshore bank accounts. In response to this, the company vehemently rejected that something was wrong and argued that "the quarterly assurance certificates (up to 30 there is a rating of A-2 and higher".

Some crypto investors do not seem to be concerned (perhaps because they assume that Tether keeps his value as long as everyone else benefits). While the crypto prices after Bloomberg's history initially fell, they have recovered since then. But there are always rumors, and last week international politicians agreed more supervision. Last but not least, that makes the Tether story a wake-up call.

Should the mainstream finance world take care of it? Some experienced artists could argue. After all, stable coins are currently behaving like the poker chips of a cyber casino.

While the tokens are used to do business within the boundaries of the crypto country, they can only be used there. As a result, it shouldn't matter whether you turn out to be part of a pyramid system, for example, as long as this casino is closed - this is the optimistic argument.

But this idea appears more and more naive. On the one hand, mainstream investors and institutions are increasingly moved to the crypto world, not least for investment purposes. On the other hand, the market now has tentacles in other areas of financial system, as Tether's stocks show in US Commercial Papers. This could be an infection risk of how FITCH ratings stated in July, especially if these products are combined with the type of leverage effect that could trigger Margin Calls in a crisis.

While stablecoins are currently being used in a "walled" casino, companies like Facebook hope to create versions of these tokens in the future that are used for the mass market and in the real world. Precede cases are important.

regulatory authorities and investors must therefore take the wake -up calls. An obvious step that all mainstream investors and institutions have to take that sneak into this world on toes is to demand better, tested guidelines for reserves. In China, the reserves for FinTech products are held at the central bank; In Kenya, a product such as M-Pesa reserves keeps on a trust account. Something similarly transparent is required for Tether and other stable coins.

A second step is that the regulatory authorities have to strengthen the coordinated global supervision. This will not be easy in view of the mobile and fleeting nature of the cyberspace. In addition, the financial supervisory authorities, such as Klaas Knot, the deputy chairman of the Financial Stability Board, found last week before a tricky silo problem: Although committees like the FSB are able to exchange data about cross -border financial streams, they have "no counterpart". in the digital area. This is important because many crypto companies call themselves "software".

It is good news that the supervisory authorities have promised to strengthen their control, and it is even more welcome that companies like Tether is forthotiating critical attention. Yes, crypto fans could cry. But without some accidents and controversy that keep investors busy, there could be a larger catastrophe. Maybe a gentle wake -up call is due.

gillian.tet@ft.com