The Bank for International Settlements (BIS) published a 29-page report on stablecoins last week. The BIS is known as the “Central Bank of Central Banks” and warns about the dangers of this asset class.
As a highlight, the organization mentions that there is no guarantee that stablecoin issuers will be able to honor refund requests at any time.
Another point analyzed by the BIS was the different types of stablecoins, which can affect their stability. The best known are those backed by fiat currencies, such as Tether (USDT) and USDCoin (USDC). Next come those backed by cryptocurrencies, such as DAI.
Although less popular, stablecoins backed by commodities, such as gold, and without any collateral were also mentioned. Each class has different safety levels, but according to BIS they are all dangerous.
“By classifying stablecoins into four different types, we show that while stablecoins backed by fiat money, commodities or other cryptoassets have generally been less volatile than traditional cryptoassets.”writes BIS.
“None of them were able to maintain equality with their equality at all times.”
Stablecoins are not safe, says BIS
Stablecoins have gained wide acceptance in recent years. In addition to providing exposure to the dollar in countries hit by hyperinflation, they are also mainly used for trading other cryptocurrencies. Therefore, they can be used both to escape moments of decline in other cryptocurrencies, and to make profits after appreciation.
However, the BIS is concerned about the redemption of these stablecoins. That is, when an investor wants to withdraw money for fiat money. In the 29-page document, the BIS states that these requests may not be met.
“There is currently no guarantee that stablecoin issuers will be able to fully redeem users’ stablecoins on demand.”
After all, while some of these stablecoins are backed, their issuers invest these funds in other assets, such as US government bonds, to generate profits. Therefore, mass withdrawals could lead to the collapse of some projects.
Another concern is exposure to banks. As a highlight, the BIS mentions the case of the stablecoin USDCoin, which lost its peg to the dollar after the Silicon Valley Bank (SVB) went bankrupt in the US earlier this year.
“When Circle, the issuer of USD Coin, held US dollar reserves at the SVB, investors began exchanging their stablecoins with USD Coin.”
At the time of writing, Tether (USDT) and USDCoin (USDC) are worth $87.5 billion and $24.1 billion respectively, making them the two largest stablecoins on the market. However, records show that more than 100 other competing projects exist.
Stablecoins are falling, says BIS
Despite still dominating trading volume among brokers, stablecoins have lost a lot of space in the sector since the collapse of TerraUSD (UST), a project tied to Terra (LUNA). The main reason may be related to market distrust.
“Between April 2022 and the end of January 2023, the total stablecoin market capitalization shrank by more than 25% to $138 billion”writes the BIS, pointing to the collapse of TerraUSD and the bankruptcy of FTX
“These events contributed to a contraction in demand for other crypto assets, which in turn reduced demand for stablecoins, as stablecoins are heavily used as a bridge to facilitate trading of crypto assets.”
Concerns about stablecoins are not exclusive to BIS. In attempting to launch the first Bitcoin ETF in the US, manager BlackRock also cited the risks these assets bring to the market. Both Tether and USDCoin were mentioned in the document sent to the SEC.
“Although the Trust does not invest in stablecoins, it may still be exposed to the risks that stablecoins pose to the bitcoin market and other digital asset markets.”
Finally, the cryptocurrency market is increasingly dependent on stablecoins. Therefore, it is logical that both the market and regulators analyze its consequences, especially since it is a new asset class.
Source: Live Coins
Barry Siefert is an accomplished journalist and author at The Nation View. He is known for his expertise in the field of cryptocurrency, and has written extensively on the topic. With a background in finance and economics, Barry has a deep understanding of the underlying technology and market forces that drive the crypto industry.
