Stable coins do not ensure a stable financial system

Steven Kelly is a senior research association at the Yale School of Management Program on financial stability.

The three largest stable coins - Tether von Tether, USDC from Circle and Busd from Paxos and Binance - are currently in a competition for security measurement. After the implosion of the largest algorithmic stablecoin, Terras VAT, they became increasingly transparent in terms of their reserves and exactly how safe they are.

This is a natural reaction to the non-unjustified fud by Tether's earlier reserves and the short de-pegging of his stable coin after Terras VAT failed. This also seems to be the emerging consensus between regulatory authorities and legislators, including the non-partisan draft law, which was quickly produced by the Financial Service Committee of the US House of Representatives.

Due to their support through safe reserves and their stable prices during the latest crypto routine, stable coins are now referred to as a refuge in the crypto universe: a place where they “park your money” if you want to sit out the wider crypto volatility and the rest source Stability in an otherwise volatile market. So the story states if we can be sure that these stable coins are not covered by risky assets, we can protect the end user and leave these beacons of stability alone.

tether answered this question with a number of comments in which its ability to meet repository and his reduction in the commercial paper stocks were emphasized-whereby it was pointed out that all of these stocks will soon be expired and replaced by treasuries. Paxos published the bank partners of Busd and a disclosure of his treasuries at Cusip level, which are both in direct possession and over reposes. In order not to be exceeded, Circle soon followed with his own disclosure of bank partners and Cusips from treasuries.

This underlines the problem on which stablecoin history is based. You can only import stability, do not produce what makes you a net outflow of stability from the financial system.

only imports, no exports ?!

Migration in market and regulatory migration to safer crypto-assets makes stable coins more and more popular, but that means that there are more investment instruments that devour the safe assets that otherwise smear the wheels of the traditional financial system. Without renewed pledge, stable coins will be a huge suction noise in the financial system: they suck safe security and kill their speed. A limited offer/limited speed of treasure changes (and treasure instructions/bonds obtained via repos) can lead to bottlenecks in the event of collateral, create incentives for creating private alternatives (which are never really safe) and put the interest rates under pressure. And of course the pledge of accumulation brings with it counterparty risks.

bank deposits currently do not have to be understood by safe assets, but that would change if these deposits were moved into the chain via a non-bank.

In addition, interest rates near zero stable coin sponsors can put pressure on. When the Fed reached the zero border during the pandemic, money market funds that concentrated on state wealth had to do without their fees in order not to erode the capital of investors. If they had also been faced with great liquidations, as was expected from assets of the cryptosphere in a time of financial instability, their solvency might have been more at risk; So that we don't forget it, their municipal and first -class colleagues needed support.

While the StableCoin business looks like it would be a nice return for the immediate future-rising Fed interest and no obligation to pass on the return to the owner-can these companies maintain parity/solvency if the interest falls again?

Second, euphemism “Parkfonds” is the same as the purchase of stable coins with “escape to cash”, which often takes place in traditional markets. However, in contrast to a central bank that expands available deposits to stop traditional market sale, this is not so stable printing formalism. The large three stable coins (regardless of the occasional Tether loan to Celsius) only shape their coins against the introduction of new fiats. This means that if the range of stablecoins is to be expanded, it is risky to find a compensation Coin Sale The cryptosphere has to get new Fiat on board. Those who put new money into the cryptosphere would then have to exchange these stable coins for riskier cryptos to stop the descent. This may have been the case when the crypto winter began at the end of 2021; Perhaps some Fiat owners thought that they had seen attractive reviews at the beginning of the crypto sale. The entire crypto market capitalization began to fall, and the stable coin offer bog down:

But since the crypto winter accelerated in May-this time primarily against the background of a risk-averse macrored field-investors have exported Fiat from the crypto ecosystem as a whole. You have undergone the process of changing off-chain, which led to a liquidation of reserves of $ 18 billion from fiat-supported stable coins (and a certain redistribution away from Tether). Fortunately, it has been a slow burning.

we still assume that stable coins could really fulfill all returns in any environment, as the sponsors like to say.

This is a profit for StableCoin consumer protection: owners are paid in equal equations in a timely manner. However, it would also require mass liquidation of money market systems: StableCoin stocks on bank deposits and reposes (probably with banks, dealers, hedge funds as a counterparties). Even the liquidation of treasure changes poses the risk that the normally reliable short -term financing will be cannibalized. Reduced funds could find their way back to the same borrowers, but it would be a cumbersome process and would certainly not happen overnight what the deadline could be. Stable coin emitters love to assure the markets, legislators and supervisory authorities that they are not “fractionally reserved”. Even if you accept your slightly liberal interpretation of "fully reserved", the fact remains that there are partially reserved units whose liabilities roll on the same markets as stable coins.

and as we have seen since May, a real exodus from the StableCoin system has nothing to do with concern about the collateral. If investors' appetite suddenly shifted from the need for reliable crypto transactional value, this could trigger a sale at the money market. And if the shift of the investors took place due to a broad macroin stability, now we could call it a bad timing.

If stablecoins would only be token. They would no longer rely on imported stability that deprives the traditional financial system security. The change between stable coins and Fiat inserts, since there was no longer any distinction, would not risk disturbing the traditional financing markets. ("Interoperability"!)

To draw a final line under the metaphor of the trade balance: Stable coins are effectively susceptible to a common problem stubborn net importers: the sudden stop.