Stable coins, they are the bridge connecting crypto and fiat to greece, providing liquidity to the crypto markets. Stable coin’s combined market capitalization has grown fourfold since the start of 2021. Tether, the largest stable coin is the world’s most traded crypto digital asset. The astonishing growth of stable coins has sparked concerns. Among regulators and financial analysts across the globe, they say that, if left unchecked stable coins could turn into a ticking time bomb ready to explode. The whole crypto DeFi thing holds up as long as everybody believes it’s fine and they’re all using it for their own trading and nobody’s ever trying to cash out. But what would happen if the crypto market suddenly lost confidence in a stable coin? According to critics, a stable coin meltdown could have a devastating impact not only on the crypto ecosystem, but also on traditional financial markets. But how justified are these concerns? What would be the consequences of a crypto stable coin meltdown and what could be done to mitigate the risk? Let’s find out.
Crypto stable coins are digital tokens whose value is packed to another asset such as fiat, currency, a commodity or a cryptocurrency. Currently, the largest and most popular stable coins, such as Coinbase USD coin and binance USD, are pegged to the united states dollar. They aim to offer the best of both worlds: priced ability of fiat currency combined with instant seamless transactions offered by crypto stable coins function like chips in the global crypto trading casino. They provide an efficient method for traders to take profit or cut their losses without having to convert their crypto into fiat like casino chips. Stable coins are valuable as long as they can be redeemed for real money. Bitcoin Investors trust in these crypto tokens depends on the assumption that, for each stable coin in circulation there is one dollar in the issuer’s reserves, and here is where it gets problematic. Most stable coin issuers haven’t been transparent when it comes to disclosing the status of their reserves and have failed to provide reliable audits. People have long been wondering whether tether the most controversial stable coin is in fact fully backed this year of 2021. Major dollar-backed stable coin crypto issuers have finally released breakdowns of their reserves.
However, the disclosures have sparked even more concerns. It turned out that only a portion of the reserves is made of cash. About 50 percent of tethers reserves are made up of commercial papers, a type of short-term corporate debt, also USDC. The second largest stablecoin appeared to be holding corporate debt as a significant portion of its reserves. Why are they holding these assets instead of cash? It’s simple to earn interest, but these revelations have left many wondering what happens in case. The company is issuing those commercial papers default on their debt. What if those assets fall in value due to a market crash? Will investors be able to redeem their stable coins for real us dollars? It’s unclear in such a scenario, the stablecoin may be unable to preserve its one-to-one pack to the us dollar. It would break the buck as they say in the worst case scenario, it could trigger a bank run where stable coin holders would try to cash out at the same time, keep them out of here. Until i get my money, your money, what about my money? Don’t be selfish at that point, the crypto stable coin issuer may be unable to meet the redemption requests, which would precipitate the token’s value even further.
This is what Caitlin long, ceo of avanti crypto coin has been warning. Stable coin users around a possible stable coin insolvency crisis, she’s worried that in this situation, getting back user’s money may be very difficult. Given the regulatory vacuum in which stable coins operate, and in that case there may not be recourse for the users of of the stable points. The treatment in the bankruptcy of a stable coin issuer is so unclear that the consumers probably would lose. Bank rounds have fueled major financial downturns, such as the great depression in the 1930s and the 2008 financial crisis. According to analysts, the collapse of a stable crypto coin, the size of tether coin could also have serious consequences on the broader crypto market when the ticket price crashes and goes down.
The crypto currency investor is gonna lose money and what’s the logical next step, he’s going to exit the crypto markets, because he will not be willing to add more risk. So he go to something safe, like what a currency that he knows that the us dollar – maybe some exchange, would take two days to complete withdrawals. We don’t know so there will be additional risk and the market will certainly crash for the next two weeks to two months. A stablecoin meltdown may not just impact the crypto ecosystem. Analysts at featuring said that such an event could compromise the stability of traditional financial markets too. For example, tether stable crypto coin is currently one of the largest holders of us commercial papers in case of a bankrupt scenario. Tether would be forced to liquidate a huge amount of those assets that would put enormous selling pressure on credit markets potentially leading to a finance crash.
Commentators, Francis Coppola, has been vocal around the risks posed by stable coins on traditional markets. Commercial paper markets are so very key to financial markets, so key in fact that the fed has actually supported them. So there is a. There is quite a risk that, if that were to happen, certainly in normal commercial paper markets that the fed might have to come in and support market, thereby thereby providing an indirect failure to stop these crypto coins.
Other crypto experts say the threat posed by a stablecoin meltdown is largely overestimated. Even if tether were to collapse, they say a competitor with more solid reserves and reputation would replace it. Usdc tether’s main competitor is already gaining market share. Perhaps thanks to its better regulated status. In the united states circle, the company behind usdc announced the makeup of its reserves will be changed to a safer mix of cash and U.S. treasury bonds. Other analysts are even convinced that a hypothetical tether coin collapse would be a bullish case for bitcoin. What if tether fails tomorrow? What does that mean sure the whole market would collapse? It means there’s only one safe store value left, bitcoin. All that money, that’s left, would probably go flow to bitcoin.
The probability of a black swan crypto event leading to a stablecoin meltdown is relatively low, and crypto investors tend to have a quite high risk tolerance. That is probably why the value of these coins has remained stable. Despite the warring disclosures around the reserves. That’s what’s so fascinating about it, the crypto market hasn’t cared the market right now says it doesn’t matter, because those stable coins, trade at par are just like the ones that are 100 backed by cash in a bank deposit there’s has never been an audited of the reserves. They promised that for five years and they never delivered and alt crypto coins keeps going up, while the markets may not care about the reserves behind stable coins.
Crypto Regulators certainly do U.S treasury secretary, Janet Yellen, has urged the creation of a clear regulatory framework around this market. While some welcomed the announcement, others are worried that U.S authorities may have a strong incentive to crack down unstable coins. The bitcoin market grew too much and they’re beginning to emerge. Some use cases for stable coins outside of crypto trading people are borrowing, lending and other stuff financial transactions that the US government cannot regulate and tax. They finally understood that it poses a risk, not the traditional markets, but it poses risk to the dollar itself. Whenever there’s a small chance of a competition to the us dollars to us dollars, they’re going to want to seize it, control it, limit or whatever.
It is still unclear, how to regulate crypto stable coins, will they impose limitations on issuer’s operations? What types of assets do crypto stable coins old in the reserves? One thing is for sure: it will have a significant impact on big players like Tether or USDC. So holders of these crypto stable coins should definitely keep an eye on this. Go look at the history of when regulatory crackdowns have occurred. They sometimes can be very sudden and consumers get their coins caught up in intermediaries that can no longer transact with them. They can lock banking access to the traditional banking system so effectively they can haunt operations of those stable coins.
Whether or not they are Cryto stable coins are located in the united states or China, this can cause a lot of crypto turbulence and crash crypto assets on some of the financial markets. Stable coins have become an essential element of the crypto ecosystem, and this technology could potentially disrupt the world of traditional finance. However, a stablecoin meltdown could have serious consequences and cannot be ruled out. A better crypto regulatory framework is needed to ensure crypto tokens are properly backed and investors funds are safe. At the same time, regulators should be careful by cracking down unstable coins which may trigger the very crypto crisis they are supposed to prevent.