JPMorgan: Stablecoin Issuers Could Disrupt the Money Market

Issuers stablecoins threaten to undermine the short-term funding market after the Fed restricted access to it, JPMorgan says, Bloomberg reports.

The Federal Reserve исключил из состава контрагентов в сделках по обратному РЕПО overnight (RRP) funds created for the sole purpose of accessing this mechanism.

The move means issuers of stablecoins will now have to compete with the $5.64 trillion money-market fund industry for assets such as U.S. Treasury bills, potentially pushing these rates below the RRP level (currently 5.3%).

«While the ban makes sense from a financial-stability perspective, it potentially risks undermining the Fed’s already soft lower bound for money-market rates, which it provides via the RRP,» the document states.

Analysts explained that the mechanism is a safe and attractive place for money-market funds, banks and other counterparties to ‘park money’ overnight.

It offers a stable, well-known rate tied to Fed policy anchors, which is often higher than many money-market alternatives such as Treasury bills or market repos.

Until the U.S. Treasury began actively issuing T-Bills from June, counterparties parked more than $2 trillion on the Fed’s balance sheet. Since then, usage has fallen by about $723 billion as money-market funds shifted funds into Treasury bills and market repos.

The shift slowed in mid-July as other investors, buoyed by yields around 5%, began displacing money-market funds.

The aggregate reserve portfolios of USDT and USDC issuers stood at $114 billion as of June 2023, of which more than 60% were Treasury bills and 25% were repo deals.

This amounts to only about 2% of the Treasury-bill market, but strategists say that further capitalization of stablecoins could push out other buyers and intensify the supply-demand imbalance. The resulting shortfall in Treasury bills and repos would be reflected in further rate declines.

Analysts noted the growing influence of these events on the cryptocurrency market in traditional finance. They cited the collapse of TerraUSD in May 2022, which demonstrated how quickly a jump in the short-term-rate segment can occur.

A rapid and broad liquidation of other high-quality liquid assets, such as Treasury bills, by a single stablecoin issuer could affect the net asset values of other stablecoin issuers and other liquidity providers, leading to even more liquidations, say the experts.

«While this is the risk of a rare event, the crypto market is exposed to it. Any mass liquidation is likely to be constrained by dealers’ balance sheets and their capacity to process it, which could also affect the NAV of other stablecoin issuers and other liquidity providers,» the analysts concluded.

Analysts at the Federal Reserve Banks of Boston and New York saw in “stablecoins” a threat to financial markets.