A Former Federal Reserve Policy Analyst Concludes That Stablecoins Are a Safer Investment Than Cash

  

Contents

• Advantages of Stablecoins
  
•  Significant Holdings in Tether and USD Coin
  
• Regulation of Stablecoins
• Committee Head's Criticism of the White House

Former Federal Reserve Board analyst Brendan Malone claims that dollar-pegged stablecoins may be safer than bank savings.

Paradigm, a corporation that does research and investments in technology, published an article by Malone on Wednesday in which he suggested that stablecoins are less likely to have a bank run than traditional banks because of the strictness with which issuers manage their reserves.

The expert said that "these reserve assets might match the stablecoins outstanding one-to-one," that they would be composed of central bank liabilities or short-dated Treasuries, that they would be kept separate from the issuer's own assets, that they would be safe from creditors, and that they would be subject to assessments or audits.

Advantages of Stablecoins

Stablecoins are digital tokens that are backed by a "stable" asset, such as the U.S. dollar or another fiat currency. They let people make advantage of the speed and security of blockchain transactions and services without having to deal with the wild price swings that have become synonymous with cryptocurrencies like Bitcoin (BTC) and Ether (ETH).

Significant Holdings in Tether and USD Coin

Over $100 billion is held in Tether's USDT and Circle's USD Coin (USDC), the two biggest stablecoins by market valuation. Regular reports detail the reserve composition of both coins' issuers, which includes almost exclusively of cash and short-term government debt.

However, banks often invest client deposits in assets with a longer expected return period, making banking a "highly risky" industry. A bank may be unable to meet all withdrawal requests during a run on deposits if the value of the bank's assets has dropped significantly.

This is precisely what happened in February and March of this year with Silicon Valley Bank (SVB). Depositors fled the bank when it revealed it had sold its long-duration bonds at a net loss of $1.8 billion.

Coincidentally, since the issuer retained more than $3 billion of its reserves in bank deposits at SVB, Circle's USDC also lost its peg to the dollar at the same time.

"The risk management framework applicable to stablecoins should be designed to manage the unique risks associated with stablecoins, which are different from those that arise in traditional banking," Malone said.

Regulation of Stablecoins

The Clarity for Payment Stablecoins Act of 2023, one of the first crypto-focused bills that might become law in the United States, was approved by the House Financial Services Committee last night and is now awaiting a vote on the House floor.

Committee Head's Criticism of the White House

However, the meeting before this one was heated: committee head Patrick McHenry chastised the White House for not compromising enough during discussions on the measure, while Democrats accused McHenry of trying to hurry the vote.

Only three Democrats joined the majority of Republicans in voting in favour (29-21). A potential roadblock in the Democratically controlled Senate might be the bill's lack of widespread bipartisan support.