Impact Of Stablecoins Like Tether To The Securities Markets

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Impact Of Stablecoins Like Tether To The Securities Markets

What just happened?

Stable currencies such as USDT which are major investors in the $1.1 trillion commercial paper market could pose new risks to short-term securities markets, the global rating agency warned Fitch Ratings. The extent and long-term risk of stable turbulence in the commercial paper markets will depend on the impact of regulatory developments on the crypto asset class, Fitch said in a news release.(1)

What does it mean?

The biggest stable, Tether, says it invests in a type of short-term corporate bond called commercial paper. The size of the linen could affect the reduced risk that stable coins will replace them, as there are less risky assets such as commercial paper. Although a stable coin falls below $1, it can retain its value because it is tied to a fiat currency and 100% backed by reserves. (2)

A stable coin is a type of cryptocurrency built to provide more stability than other cryptocurrencies because it is backed by an asset such as the US dollar or gold., precious metals & algorithmic functions. There are several types of stable coins that are not backed by fiat currencies.(3)

Unlike money markets and mutual funds, stable coins encourage buyers to realize that their money is as safe as it is in an insured savings account, but they also carry significant risks. Stablecoins are not linked to a centralized financial system, and unlike bitcoin-backed stablecoins, there is no change from the regulator that controls the Stablecoins bond. The risks of certain stable coins can be difficult to understand, and the lack of transparency in assets means that we do not know what is going on behind the scenes. (4)

How does it impact the legal sector?

The premise of fiat-backed stablecoins such as USDT is to mint and support dollars held in the cryptocurrency market. The one-to-one nature of stable coins - in theory a tether coin is worth one US dollar - is the basis of their appeal, but it also makes them vulnerable to banks runs. (5)

Last month, Eric Rosengren, chairman of the Boston Fed, highlighted the exponential growth of stable coins and the potential problems associated with reserve blends. Fed Chairman Jerome Powell has said that digital currencies of US central banks could make cryptocurrencies and stable coins such as the USDC superfluous. If digital dollars cut the dollar peg for stable coins, that would mean "zero counterparty risk," Mizrach said. (6)

USDC, a dollar-denominated stable coin, and other stable coins pay higher interest rates than deposits in traditional FDIC bank accounts, reflecting stable currencies. Ratings agency Fitch warned earlier this month that the rapid growth of stable coins could have destabilizing effects on short-term credit markets. It acknowledged that the model differs from USD coins of which there are more than 20 stable coin complexes that ensure that their dollars in deposits are tied to cash. (7)

The cryptocurrency exchange Coinbase offers a fiat-secured stable coin called USD Coin that can be exchanged for a US dollar in a ratio of 1: 1. A contemporary parallel to stable coins is the money market fund, a type of investment fund that provides stability with modest returns, Gorton and Zhang write. The logic is that stable coins behave like money market funds and should be regulated in the same way. (8)

In New York, the attorney general investigated Tether and cryptocurrency exchange Bitfinex, alleging that parts of them concealed stable coin reserves at one point. Under a settlement agreement, the attorney general's office determined that Tether's reserves were backed by stable coins that had been in circulation for some time. However, this was not the case with all barn coins, as $600 million was stolen and PolyNetwork frozen 33 million tether coins, including some that were stolen. (9)

In conclusion, regulators are increasingly concerned that jumpy stable coins and dollar-linked cryptocurrencies are sowing instability in financial markets, particularly in hyper-volatile cryptocurrencies such as Bitcoin. For instances, earlier their year, the billionaire crypto investor Mark Cuban called for stricter regulation of stable coins after the price of a new token he had invested in fell to zero and the fund owner had liquidated it. (10)

 

The Legists Content Team

Assessing Firms:

#Allen & Overy LLP #Clifford Chance LLP #Hogan Lovells International LLP #Latham & Watkins #Linklaters LLP #Norton Rose Fulbright #Slaughter and May #Addleshaw Goddard #Ashurst #Baker McKenzie #Bird & Bird LLP #CMS #Deloitte Legal #DLA Piper #Eversheds Sutherland (International) LLP #Fieldfisher #Osborne Clarke LLP #Paul Hastings LLP

1https://news.yahoo.com/stablecoins-tether-could-pose-risks-144807323.html

2https://www.fool.com/the-ascent/cryptocurrency/articles/could-stablecoins-topple-the-crypto-industry/, https://www.nytimes.com/2021/09/17/business/economy/federal-reserve-virtual-currency-stablecoin.html and https://www.investopedia.com/terms/t/tether-usdt.asp

3https://www.fool.com/the-ascent/cryptocurrency/articles/could-stablecoins-topple-the-crypto-industry/ and https://www.nerdwallet.com/article/investing/stablecoin

4https://www.fool.com/the-ascent/cryptocurrency/articles/could-stablecoins-topple-the-crypto-industry/, https://www.nerdwallet.com/article/investing/stablecoin and https://insights.som.yale.edu/insights/how-stablecoins-could-unleash-chaos

5https://www.fool.com/the-ascent/cryptocurrency/articles/could-stablecoins-topple-the-crypto-industry/ and https://insights.som.yale.edu/insights/how-stablecoins-could-unleash-chaos

6https://www.reuters.com/article/uk-global-crypto-currency/column-the-instability-in-stablecoins-unnerving-regulators-idUSKBN2EK0PM, https://www.theverge.com/22620464/tether-backing-cryptocurrency-stablecoin and https://www.cnbc.com/2021/08/18/the-fed-is-worried-the-rise-of-stablecoins-could-impact-financial-stability.html

7https://www.reuters.com/article/uk-global-crypto-currency/column-the-instability-in-stablecoins-unnerving-regulators-idUSKBN2EK0PM and https://www.sia-partners.com/en/news-and-publications/from-our-experts/risks-stablecoins-pose-cryptocurrency-market

8https://www.fool.com/the-ascent/cryptocurrency/articles/could-stablecoins-topple-the-crypto-industry/, https://www.nerdwallet.com/article/investing/stablecoin and https://insights.som.yale.edu/insights/how-stablecoins-could-unleash-chaos

9https://www.nytimes.com/2021/09/17/business/economy/federal-reserve-virtual-currency-stablecoin.html and https://www.theverge.com/22620464/tether-backing-cryptocurrency-stablecoin

10 https://www.reuters.com/article/uk-global-crypto-currency/column-the-instability-in-stablecoins-unnerving-regulators-idUSKBN2EK0PM and https://www.sia-partners.com/en/news-and-publications/from-our-experts/risks-stablecoins-pose-cryptocurrency-market

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