The Reserve Bank of Australia says the $US150 billion ($200 billion) stablecoin market could pose a risk to global financial stability because a run on the coins could trigger a fire-sale of real-world assets such as commercial paper, loans and bank deposits.
Stablecoins are cryptocurrencies that are designed to track the value of fiat currencies such as the US dollar or other assets such as gold.
The Reserve Bank is monitoring the potential financial stability risks posed by stablecoins.Matt Davidson
The total market capitalisation of these assets has increased by more than 400 per cent since 2021 to $US145 billion, compared to a 250 per cent increase in all crypto assets to $US2.2 trillion, the Reserve Bank said in its semi-annual health check of the financial system.
That equates to about 5 per cent of the value of the S&P 500.
These assets are used by crypto investors to reduce their risk exposure to crypto-currencies such as bitcoin and ethereum without moving their investments back into fiat currencies.
Advertisement But central banks say there is a distinct lack of transparency and the interconnectedness with the traditional finance system pose a growing stability threat.
Stablecoin providers hold assets to back their stablecoins on issue, but are not required to disclose the composition of those assets, the Reserve Bank said in the Financial Stability Review released on Friday.
“For some providers, these assets comprise a mix of commercial paper, other short-dated securities, cash, loans and other crypto-assets, which exposes these providers to credit, liquidity and currency risks.Some stablecoins are therefore vulnerable to runs, which could lead to fire sales of the assets that back them, potentially disrupting critical funding for traditional market participants.”
Among the most prominent stablecoins are Tether, which accounts for about $US82 billion of the total market for stablecoins, followed by USD Coin.
Tether intrigue Tether, for example, issues new tether holdings to customers equal to the amount of dollars invested in it by its customers.The proceeds are then held in a reserve that are invested in a pool of safe-assets such as government bonds, commercial paper, loans and crypto-currencies.
Advertisement But the composition of assets underlying Tether, and the degree to which the pool of assets matches the invested value, has been a source of intrigue and at least one regulatory investigation.
Earlier this month The Wall Street Journal reported that several hedge funds have been amassing short bets against Tether after forming a view that there may be undisclosed losses in its portfolio of assets
But a spokesperson for Tether said it had “stress tested time and time again and passed with flying colours”.
The Reserve Bank also said there was a risk that a run on one stablecoin “would precipitate a run on other stablecoins given the lack of transparency and assumed similar asset holdings”.
Beyond stablecoins, the Reserve Bank said there were limited risks posed to the broader system by crypto-assets due to “their small scale relative to, and limited direct links with, the broader traditional financial system”.
“However, the rapid growth of crypto-assets and expanding interest from traditional institutional investors suggest these risks are likely to increase
in the future,” the Reserve Bank said.
It also noted that there had been a significant increase in the correlation between crypto assets and equities as more institutional investor and mainstream speculators gravitate toward the fast-growing sector.
Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate debt, private equity and investment banking.He is based in Sydney.Connect with Jonathan on Twitter .Email Jonathan at [email protected].