Economist Eswar Prasad warned {that a} financial institution run on Stablecoins might fallout into the U.S. bond markets if issuers promote U.S. Treasurys to honor redemptions.
Prasad warned that if a financial institution run ought to happen whereas bond market sentiment stays “very fragile,” there might be a “multiplier impact” because of immense promoting strain on Treasurys.
“A big quantity of redemptions even in a reasonably liquid market can create turmoil within the underlying securities market. And given how vital the Treasury securities market is to the broader monetary system within the U.S. … I believe regulators are rightly involved.”
Stablecoins reminiscent of Tether (USDT) are backed by billions of {dollars} in reserves to accommodate mass-redemptions situations, in accordance with USDT’s November 2022 report.
Nevertheless, Prasad warned regulators that if many customers attempt to redeem their Stablecoin for fiat, issuers reminiscent of USDT must unload their belongings of their reserve.
“When you have a big wave of redemptions that may actually harm liquidity in that market.”
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