Ithaca, NY- Eswar Prasad, a professor of economics at Cornell University, has warned that a collapse in stablecoins could have a significant impact on the US bond market. In a statement released on January 15th, Prasad noted that if stablecoin issuers were forced to sell off reserves of US government bonds, the resulting “squeeze” could destabilize the bond market.
What Are Stablecoins?
Stablecoins are a type of cryptocurrency that is pegged to the value of an underlying asset, such as the US dollar. They are intended to provide a more stable alternative to traditional cryptocurrencies like Bitcoin, which can be highly volatile. Some of the most popular stablecoins include Tether (USDT) and USDC.
How Could a Collapse in Stablecoins Affect the Bond Market?
According to Prasad, if a large number of stablecoin holders attempt to convert their stablecoins into fiat currency, the stablecoin issuers may be forced to sell off their reserves of US government bonds in order to meet the demand. This could lead to a “multiplier effect” in the bond market, as the sudden influx of bonds onto the market would put downward pressure on bond prices.
What Are the Potential Risks?
Prasad also warned that if the bond market is already in a fragile state, the resulting squeeze could lead to further volatility. He added that “considering the importance of the US bond market to the broader US financial system, I think the concerns of regulators are warranted.”
While there are currently no major signs of a stablecoin collapse, Prasad’s warning highlights the potential risks of stablecoins, and the importance of continued monitoring by regulators.