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A stablecoin threatens stability

Tether_alamy_8Jul21_575

For those in the world of grown-up finance, the cryptocurrency world has often been the subject of amused scorn or mild envy. It is very much its own game, and it scarcely seems to inhabit the same world as staid, professional markets like that for commercial paper. But all that is changing and regulators must pay attention.

Tether is a so-called stablecoin, a cryptocurrency pegged 1:1 to the dollar, designed to allow people to shift in and out of various cryptocurrencies, while keeping their assets firmly in the crypto world.

Bitfinex, the crypto exchange that controls Tether, revealed earlier this year that around 50% of the volume of Tether — some $32bn — is collateralised not by cash, but by commercial paper. A $32bn commercial paper holding makes Tether a big dog in money markets.

But it is not, of course, a regulated money market fund and it is therefore very unlikely to merit the intervention of the Federal Reserve in the event of a liquidity crisis of the sort that caused the Reserve Primary Fund to break the buck following Lehman Brothers' bankruptcy in 2008.

Tether is hardly immune from runs. Despite its 3.2m users, the top 100 holders owned 45.7% of coins on issue as of Thursday, according to Coinmarketcap. It also has a chequered legal record, having paid an $18.5m fine to the New York Attorney General’s office in February for covering up an $850m loss. 

If Tether were to suffer a run and dump its CP, Fitch has pointed out that the size of Tether’s holdings means it would have a real and tangible effect on the stability of vital short term credit markets.

Cryptocurrency markets are no longer a playground. Their scale is such that absence of regulatory oversight can pose a threat to financial stability.

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