LONDON: Regulators are getting anxious about how mushrooming ‘stablecoins’ - mostly dollar-pegged crypto tokens - could sow instability in wider financial markets more directly than already hyper-volatile cryptocurrencies like Bitcoin. Western central banks and watchdogs have to date mostly stood aside from cryptocurrencies, emphasising transparency and a ‘caveat emptor’ approach to what they see as largely speculative vehicles rather than transaction currencies per se.
The growing involvement of mainstream banks and asset managers pushes them up the radar screen, but harsher curbs don’t seem imminent yet.
But explosive issuance of stablecoins, which have grown 18 fold over the pandemic to more than $100 billion, is a different matter and has been setting off alarm bells all year.
Stablecoins are essentially cryptocurrencies - verified on decentralized public ledgers or blockchains - but are designed to have a stable value relative to hard currencies or gold to avoid the sort of volatility that makes bitcoin and other tokens almost impossible for most commerce.
While they operate independently of traditional banking systems, it’s the assets they use to theoretically peg their value that loops them into the real world - much like a sci-fi portal from the “upside-down” world of crypto to the material world that watchdogs are paid to be anxious about.
Whether eventually used for online payments or simply to grease the wheels of the so-called Decentralised Finance of crypto credit markets, the stablecoin universe is so far dominated by two main tokens, Tether and USD Coin.
Facebook-backed Diem, formerly known as Libra, is another in the works. But it has yet to launch amid intense governmental scrutiny and pushback over its potential scale and systemic risks.
Launched in 2014, however, Tether is already more than 60% of the $100 billion total currently issued.
What it uses as reserves to fulfil the promised one-for-one peg with the dollar is what rankles regulators. It’s not solely dollar cash, as many might assume, but a mix of commercial paper, bills, bonds and loans.
According to Tether, about 50% of its reserves - some $20 billion - were in commercial paper at the end of March, 12% in secured loans and 10 percent in corporate bonds, funds and precious metals. Only 2.9% was in dollar cash.
Fitch credit rating agency warned this month that the rapid growth of stablecoins could have destabilising effects on short-term credit markets, although it acknowledged models differed and USD Coin - more than 20% of the stablecoin complex - ensures its dollar peg with cash in custody accounts.
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