The Federal Reserve Banks of Boston and New York have jointly released a detailed report examining the potential impact of stablecoins on the wider economy. Titled "Runs and Flights to Safety: Are Stablecoins the New Money Market," the 49-page report draws parallels between stablecoins and conventional finance vehicles such as money market funds (MMFs), both of which offer money-like assets to investors through liquidity transformation. However, the report also highlights the potential risks of continuous liquidity issuance, which could leave these assets vulnerable to runs. Additionally, the report includes a case study of stablecoin runs, with a focus on incidents involving USDT and USDC in 2022 and 2023, comparing them to the runs experienced by money market funds in 2008 and 2020. US Fed warns against stablecoins' impact on economy.
If stablecoins become increasingly intertwined with critical financial markets like short-term funding, they could pose a risk to the overall economic system.
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Other key findings indicate that stablecoins present a wide range of risk profiles compared to MMFs.
The report also highlights that certain stablecoins are backed by secure assets like cash and U.S. Treasuries, while others rely on riskier collateral such as other crypto assets or even corporate debt.
In situations where the collateral supporting certain stablecoins loses value, they are likely to deviate from their intended value and result in significant losses.
Furthermore, stablecoins that maintain their value through algorithms based on supply and demand are not immune to these risks and may face a situation where investors lose confidence and start withdrawing their investments.
The data-driven document also emphasizes various stressful events that have already caused billions of dollars in losses.
Some notable examples include the collapse of Terra in May 2022 and the connection between USDC and the now-liquidated Silicon Valley Bank (SVB).
Investors have a tendency to sell their stablecoin assets when the value drops from $1 to $0.99, which can cause the asset to completely depeg and crash for remaining investors. Similarly, MMFs are typically valued at $1.00 and maintain a threshold of $0.995. If the market price falls below this threshold, investors may seek safer alternatives, resulting in an automatic decrease.
Stablecoin Safe Haven Status on a Thread
The beginning of 2023 has seen some indications of a wider market recovery, but the recent actions taken by the U.S. Securities and Exchange Commission (SEC) have caused uncertainty. Major exchanges such as Binance and Coinbase have been hit with legal action due to the alleged trade of unregistered securities and unclear categorization of assets as "securities" or "commodities".
Stablecoins, which are often used as a hedge against inflation and loss during market turbulence, are now being viewed as ineffective by investors. A recent report by CCData showed that the total market cap of the stablecoin sector was $124 billion in July, representing an 11.6% decrease after an 18-month period of stagnation that affected most asset sectors.
Several factors contributed to this decline, including Binance.US's suspension of fiat deposits due to legal action initiated by the SEC and MakerDAO's decision to delist USDP because it failed to generate additional revenue. Furthermore, the global exchange Binance has announced that it plans to delist all stablecoins in Europe by June 30, 2024.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.