Ithaca, NY- Eswar Prasad, a professor of economics at Cornell College, has warned {that a} collapse in stablecoins may have a big affect on the US bond market. In a press release launched on January fifteenth, Prasad famous that if stablecoin issuers had been pressured to unload reserves of US authorities bonds, the ensuing “squeeze” may destabilize the bond market.

What Are Stablecoins?

Stablecoins are a kind of cryptocurrency that’s pegged to the worth of an underlying asset, such because the US greenback. They’re meant to supply a extra steady various to conventional cryptocurrencies like Bitcoin, which could be extremely unstable. A few of the hottest stablecoins embody Tether (USDT) and USDC.

How Might a Collapse in Stablecoins Have an effect on the Bond Market?

Based on Prasad, if a lot of stablecoin holders try and convert their stablecoins into fiat foreign money, the stablecoin issuers could also be pressured to unload their reserves of US authorities bonds in an effort to meet the demand. This might result in a “multiplier impact” within the bond market, because the sudden inflow of bonds onto the market would put downward strain on bond costs.

What Are the Potential Dangers?

Prasad additionally warned that if the bond market is already in a fragile state, the ensuing squeeze may result in additional volatility. He added that “contemplating the significance of the US bond market to the broader US monetary system, I believe the considerations of regulators are warranted.”

Whereas there are at the moment no main indicators of a stablecoin collapse, Prasad’s warning highlights the potential dangers of stablecoins, and the significance of continued monitoring by regulators.