Stablecoin Collapse May Have an effect on US Bond Market, warns Cornell Professor of Economics

Ithaca, NY- Eswar Prasad, a professor of economics at Cornell College, has warned {that a} collapse in stablecoins might have a major impression on the US bond market. In an announcement launched on January fifteenth, Prasad famous that if stablecoin issuers have been compelled to unload reserves of US authorities bonds, the ensuing “squeeze” might destabilize the bond market.

What Are Stablecoins?

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

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

Based on Prasad, if a lot of stablecoin holders try to convert their stablecoins into fiat foreign money, the stablecoin issuers could also be compelled to unload their reserves of US authorities bonds as a way 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 might 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 presently no main indicators of a stablecoin collapse, Prasad’s warning highlights the potential dangers of stablecoins, and the significance of continued monitoring by regulators.