A Cornell University professor warns of the potential impact a collapse of a major stablecoin could have on the U.S. bond market Eswar Prasad says if a large stablecoin faced a collapse, the number of Treasury bonds they would need to sell could disrupt the U.S. bond market and affect prices.
Cornell Professor Warns of Danger of Stable Coin Collapse
Cornell University economics professor Eswar Prasad warns of the damage that bank runs could cause to the traditional U.S. financial system in the wake of a potential collapse of major stablecoins. While the latest collapse in the crypto economy did not reach legacy financial structures, Prasad believes that stablecoins and their operations pose a risk in this regard.
In an interview with CNBC, Prasadargued that stablecoins use U.S. Treasuries as a backup to maintain their peg value. If one of the big stablecoins in the market faced a collapse or bank run, these organizations would have to redeem these bonds to handle their own redemptions, which would affect the government bond market.
said Prasad.
A large number of redemptions, even in a fairly liquid market, could disrupt the underlying securities market. And given how important the Treasury securities market is to the broader U.S. financial system, I think regulators are rightly concerned.
According to their report, the top three stablecoins all hold large amounts of U.S. Treasuries; according to a report issued in November, Circle, Tether, and Paxos, the issuers of the top three stablecoins in the crypto market, hold nearly $60 billion in This means that.
Incoming Regulations
While a clear regulatory framework for stabled coins in the U.S. has not yet been established to address the potential problems from their collapse, regulation could be on the horizon: in December, Republican Senator Pat Toomey introduced the Stable Coin Operations Regulation without Stifling Innovation The Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022, also known as the TRUST Act, was introduced for the purpose of regulating stablecoin operations without stifling innovation.
In addition, the U.S. House Financial Services Committee recently established the “first ever” Digital Assets, Financial Technology, and Inclusion Subcommittee, intended to provide clear rules for the digital cryptocurrency ecosystem, which may include stablecoins in the future.
The stablecoin market was rocked when UST, the top five algorithmic stablecoin in 2022, collapsed, going from roughly $10 billion in capital in January to just $215 million in December.
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