Stablecoins and the Logistics of Financial Stability

As chronic importers of stability, stablecoins leave the financial system vulnerable to the 'sudden stop'

My note for Financial Times Alphaville:

The three biggest stablecoins — Tether’s tether, Circle’s USDC, and Paxos and Binance’s BUSD — are currently in a safety-measuring contest. After the implosion of the largest algorithmic stablecoin, Terra’s UST, they’ve been increasingly transparent about their reserves and exactly how safe they are.

This is a natural response to the not-unjustified FUD over Tether’s past reserves, and the brief de-pegging of its stablecoin following the failure of Terra’s UST. This also seems to be the emerging consensus among regulators and lawmakers, including the bipartisan bill quickly emerging from the U.S. House financial services committee.

Because of their backing by safe reserves and their stable prices throughout the recent crypto rout, stablecoins are now characterised as a refuge in the crypto universe: a place to “park your funds” when you want to sit out the broader crypto volatility and the source of stability in an otherwise volatile market. So, the story goes, if we can be sure these stablecoins aren’t backed by risky assets, we can protect the end-user and leave these beacons of stability be. Tether has addressed this question with a series of comments highlighting its ability to meet redemptions and its reduction in commercial paper holdings — noting that all such holdings will soon run off and be replaced with Treasuries. Paxos released BUSD’s banking partners and a CUSIP-level disclosure of its Treasuries, both directly owned and obtained through repos. Not to be outdone, Circle soon followed with its own disclosure of banking partners and owned Treasuries’ CUSIPs.

This highlights the problem that underlies the stablecoin story. They can only import stability, not manufacture it, making them a net drain of stability from the financial system. ...

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