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”.
So to that end, let me propose a taxonomy of stablecoins that we can use to answer this question with greater specificity.
Category 1: Regulated Fiat-Backed Stablecoins
Without naming too many names here, these are stablecoins that exist well within the regulatory perimeter, have rules around reserve management, are (likely) bankruptcy remote, and so on. In short, they look a lot like a government money market fund.
Category 2: Unregulated Fiat-Backed Stablecoins
Here, we have more questions. Right now, the biggest player in this category (Tether) is currently mostly backed by T-Bills and attempting to become more transparent over time, to what extent they are willing and/or able. But they have owned riskier things in the past, and there are more questions outstanding. Thus, the risk profile looks more like an uninsured bank or prime money market fund.