The growth in the issuance of not fully backed ‘safe-asset’ stablecoins could lead to breaches of financial stability and, as a result, tighter regulation. Such conclusions are contained in a note from Fitch Ratings.
Analysts at the ratings agency cited USD Coin (USDC) as an example of a fully collateralized stablecoin that presents less risk to financial markets. They warned that authorities are still studying the degree of ‘globality’ or ‘systemicity’ of such assets.
Issuers of stablecoins that use partial backing or allocation of collateral in higher-risk assets may face a greater likelihood of ‘deposit runs’, the experts warned.
Analysts mentioned Tether. According to the ‘Transparency Report’ for the first quarter of 2021, only 26.2% of its collateral consisted of cash, fiduciary deposits, reverse repurchase notes and government securities.
Nearly half of the issuer’s reserves were placed in commercial papers. This $20.3 billion equivalent could exceed the AUM of most money market funds in the US and in the region EMEA, the experts noted.
A sudden mass redemption of USDT could affect money-market stability, especially if it coincides with the redemption of other stablecoins that hold reserves in similar assets, the experts warned.
The report also mentions Facebook’s regulated digital currency Diem. Its creators proposed to hold 80% of collateral in government securities, with the remainder in money-market funds.
Fitch Ratings allowed for tighter regulation of stablecoins if such projects become systemic. Analysts believe that this would enable authorities to combat potential ‘contagion’ risks to money markets associated with the liquidation of reserve assets by stablecoin issuers.
As a reminder, Boston Fed President Erin Rosengren called the stablecoin Tether ‘a challenge’ to financial stability.
Earlier, Lael Brainard, a member of the regulator’s Board of Governors, expressed concerns about potential risks of stablecoins for consumers and businesses.
In January, Fed Chair Jerome Powell stated that ‘regulation of stablecoins is more important than issuing a digital US dollar’.
In June, Fed Vice Chair Randall Quarles urged not to fear stablecoins and to structure them properly.
By the end of May, the total market capitalization of stablecoins surpassed $100 billion.
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