Most of the assets were riskier—about half of them commercial paper. Stablecoins’ growth from a value of $14bn in August 2020 to over $100bn today has given them a big financial footprint. Extrapolating Tether’s disclosures implies that it owns over $30bn-worth of commercial paper, which probably makes it the asset class’s seventh-largest investor, not far off funds run by Vanguard and BlackRock, according to JPMorgan Chase. With estimated leverage of 383-to-1, Tether would be unable to honour all its tokens after losses of just 0.26%—a safety cushion that regulators would never allow at a bank.
Few stablecoins say much about their balance-sheets. Tether’s disclosures of the breakdown of its assets are puny and fall far below the standards expected of a bank. In February Tether was among the defendants who agreed to an $18.5m fine with New York’s attorney-general, which said that in 2017 Tether had misled the market about its US dollar backing and that it had not accurately disclosed the transfer of $625m of its assets to Bitfinex, an online trading platform. Tether says the funds were repaid and that it has a “total commitment to transparency”.
No wonder Mr Gensler calls cryptocurrencies a Wild West. Some policymakers have compared stablecoins to the period of “free banking”, when privately issued banknotes of uncertain backing and worth circulated in America’s economy in the 19th century. A more useful comparison is with money-market funds, which were created in the 1970s to circumvent rules limiting the interest banks could pay depositors. After promising to maintain the value of their shares at a dollar, money-market funds blew up in 2008 in the global financial crisis. American taxpayers stepped in to forestall a fire sale of their assets and a crash in the market for commercial paper, on which the real economy depends. A collapse of stablecoins could look similar.
Regulators must act quickly to subject stablecoins to bank-like rules for transparency, liquidity and capital. Those failing to comply should be cut off from the financial system, to stop people drifting into an unregulated crypto-ecosystem. Policymakers are right to sound the alarm, but if stablecoins continue to grow, governments will need to move faster to contain the risks.
