The Biden administration, the Federal Reserve System, and the Financial Stability Board recently raised concerns about “stablecoins,” suggesting that these unique cryptocurrencies could pose a significant risk to global financial stability.
After Bitcoin and Libra – Facebook’s digital currency awaiting access – the global financial regulator has a new enemy: stablecoins. The Financial Stability Board (FSB) specifically targeted these cryptocurrencies in its report on the risks of crypto assets, published on February 16.
The growth of stablecoins continued into 2021 “despite concerns about regulatory compliance, the quality and adequacy of reserve assets, and standards for risk management and governance,” writes the global organization, which was established by the G-20 in 2009. Now, it said, it is also on the cusp of compromising financial stability. global risk.
Stability in a fickle world? The status of stablecoins as a villain in the world of finance may seem surprising for a cryptocurrency that was originally created in order to “curb the volatility of Bitcoin and properly stabilize the field,” Natalie Jansson, an economist and cryptocurrency specialist at Neoma Business School, told France 24. .
Stable coins are cryptocurrencies whose price practically never changes, as they are indexed using a base reference such as the US dollar. For example, Tether – the most famous and most widely used of all stablecoins – always has a value of 1 US dollar.
This promise of stability has made stablecoins, especially tethers, “the bridge between fiat currencies (such as the dollar, the euro, the yuan, etc.) and cryptocurrencies,” financial analyst and cryptocurrency expert at IG Consulting, Vincent Pouille, told FRANCE 24.
Essentially, investors in Bitcoin and Ethereum (another cryptocurrency) avoid changing prices by exchanging their coins for Tethers, USD coins or binance USD – all types of stablecoins – in order to find out the exact dollar value of their wallet. Some platforms require users to convert their cryptocurrency to stablecoins first before changing them to dollars or other fiat currencies.
To ensure their value, the creators of “stable” cryptocurrencies must always keep the same amount of dollars in reserve as the number of stablecoins in circulation. For example, in December 2021, the founders of Tethers said they had $78.2 million in the bank to cover 78 million coins in circulation.
Boy said that “systemic risks looming?” This means that “the existing ropes have a market value similar to that of the bank”. And this is the result of a rapid appreciation in value: in December 2021, the market capitalization of all stablecoins was around $157 billion, “up from $5.6 billion at the beginning of 2020,” according to FBS.
Increases in the value of Tethers in particular caused financial authorities around the world to break out in a cold sweat. In the US, the Federal Reserve discussed the threat to stablecoins at a meeting in August 2021. “The questions being asked are how to make sure of that. [the creators] Bowie really said he had the necessary reserves and whether the Tether was about to collapse.
Boy said that the rising status of stablecoins is one of the main signs of “the democratization of investments in cryptocurrency.” The more people want to exchange dollars for bitcoins, moneros, etc., the higher the volume of transactions and the more stable the currencies there are in circulation.
It follows that it is no longer just insiders who own Tethers and other stablecoins, “but also traditional mutual funds, corporations and even banks,” Janson said. This is what the FSB describes as the “increasing interdependence of stablecoins with the traditional financial system.”
If these stablecoins fail, it will initially mean financial losses for investors in the stock market, which could lead to broader effects on traditional financial markets, as feared by the FSB and the US Federal Reserve.
For now, the risk is relative. “The stabilizing financial impact of currencies is significant, but central banks have the ability to cover losses if there is a problem without hurting their balance sheets too much,” Bowie said.
However, if tether and other stablecoins continue to grow at the same pace as in recent years, it could “reach a systemic size, meaning it has become “too big to fail,” he added.
Transparency and crystal balls As long as the stablecoin creators have sufficient reserves, there is no risk of failure. But this is another aspect of concern to the financial authorities: “Stablecoin issuers are not subject to a consistent set of standards regarding the formation of reserve assets … and there is a lack of consistency in disclosure practices,” the Federal Security Council warned.
For now, the FSB has to take promises from stablecoin makers at face value since audits of their reserves – when they are conducted – are not necessarily carried out by leading organizations or according to international standards. Just three years ago, Tether was widely suspected of being nothing but a major scam — hardly reassuring for a cryptocurrency that is now central to an entire financial ecosystem.
However, stablecoins have made some efforts towards transparency. “What we know now is that they not only have dollar reserves but also short-term investments that allow them to make the payments,” Janson said.
But this is still a problem. “The authorities are obsessed with the idea of a new liquidity crisis like the one that occurred in 2008,” she added. In the age of subprime mortgages, when the market realized that the financial products offered by Lehman Brothers and others were based in part on worthless assets, no one wanted to touch them anymore, plunging banks into a deep financial crisis.
What would happen if the same scenario happens with stablecoins that are not 100% transparent about their reserves? For example, some stablecoins may be linked to debt from Evergrand [the Chinese real-estate giant verging on failure], as suggested for Tether. In this case, the value of the reserves could become much lower, which could make it impossible to compensate everyone if they needed to,” Bowie said.
Hence the calls from the FSB and the Federal Reserve to regulate stablecoins and place them under similar obligations to banks. US President Joe Biden also called for tighter controls.
But for Janson, such measures would go too far. She suspects that the authorities are keen to put up roadblocks to prevent stablecoins from competing with national cryptocurrencies currently under development in many countries. She said: Why do we want to treat them like banks? It will be enough to impose stricter transparency obligations, because that is the main problem.”
This article has been translated from the original into French.