Cryptocurrencies, News

Crypto presents systemic risks and requires swift remediation

WASHINGTON (Reuters Breakingviews), September 9th, 2018 – Cryptocurrency companies are growing in size and causing problems for the wider financial system. But U.S. regulators haven’t kept up. The Chair of the U.S. Securities and Exchange Commission, Gary Gensler, told Financial Times Wednesday that digital asset trading platforms now amount to $2 trillion. However, some coins like Tether are backed with fiat currencies. Regulators must rein in assets.

Stablecoins are cryptocurrencies that are backed with assets such as the dollar and euro. However, they may not be as secure in times of crisis. Many issuers claim that they have enough money to pay all digital currency holders in case the market crashes and all users redeem their stablecoins simultaneously. However, assets backing many of these currencies prove that this can be a risky promise. Tether, for example, is the largest stablecoin, with $67.5 billion in circulation. It makes up approximately 55% of the market.

It is supported by less liquid instruments, a large portion of which is cash and bank deposits. According to an independent accountant, cash and bank deposits accounted for only 10% of Tether’s assets at the end of June. Treasuries accounted for 24%. Nearly half of Tether’s assets were backed by commercial papers and certificates de deposit, with a total value of $31 billion. According to data from Investment Company Institute, this represents about 20% of short-term corporate debt that was held by prime money markets funds.

This is a concern for the wider market. In March 2020, investors took their cash from prime money market funds. This caused a decline in commercial paper investment. According to a working group from U.S. financial institutions, the cost of borrowing short-term corporate debt was at its highest point since 2008’s financial crisis.

In an effort to alleviate the pressure, the Federal Reserve provided a temporary support facility. Fitch Ratings in July warned that Tether’s sudden redemption could impact “the stability and liquidity of short-term credit market.”

Stablecoin stability could be strengthened by establishing liquidity rules, which require that a certain amount of safest assets such as U.S. Dollars, is held. This is also an area in which regulators have greater real-world experience. They may face a wider crisis if they don’t accelerate it.