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Stablecoin Liquidation
Or, Would it Crash the Financial System?
Recently, the Federal Reserve had some things to say about crypto, the White House had some things to say about crypto, and then many of those things made their way into the Federal Register about crypto.
Among many other topics, the concerns raised by these regulators touch on one of my favorite things in crypto and something I’ve been thinking about and working with for half a decade: stablecoins.
Ignoring some of the other concerns raised about stablecoins, one of the most frequently raised discussion points is a simple one:
Would the collapse (in terms of redemptions) of a stablecoin cause contagion in the traditional financial system?
To answer this, first we have to clarify the starting point, and then there is actual data that can answer many of these questions.
What Does Stablecoin Mean?
The first question we need to answer is what, exactly, do we mean by stablecoin in this context? I say this because the word “stablecoin” is used to capture a broad basket of things, not all of which are stable (though, hopefully all of which are coins). It has about the same level of specificity at this point, for the tradfi folks in the audience, as the word “bond”.
