Stablecoin Market Risk For Financial Markets ECB Warning Raises Global Alarm

Stablecoins have been recognised as a major risk to financial markets globally, and the European Central Bank has added its voice to the concerns. The ECB argues that a sudden fall in confidence in stablecoins could lead to a financial chain reaction of a sharp magnitude.The majority of stablecoins are collateralised by cash-like assets and short-term US Treasury securities. In the case of massive redemptions, the issuers might have to sell these assets off at a rapid pace. Such selling to this extent may cause disturbances in the treasury markets and hence, lower the global liquidity.It is not only crypto products that stablecoins are associated with. They have already connected to conventional finance through their reserve systems and payment networks. Their global acceptance is thus causing the systemic risk to be raised along with it.The global stablecoin market has surpassed a total USD 280 billion in capitalisation, which is a size that can be compared to that of large money market funds. The major part of the world’s stablecoins is in US dollars, and their support is provided by highly liquid debt instruments.The market is primarily controlled by USDT and USDC. They are the biggest players in the game, and their supply leads the circulation of stablecoins. Their size also means that when just a few investors panic, it can result in massive redemption flows.Redemptions of such volumes force issuers to liquidate their US Treasuries quickly. That, in turn, indirectly intensifies the pressure on the bond markets and the global funding conditions.The European Central Bank has issued a caution that a run on stablecoins could lead to the US Treasury market facing a situation of forced liquidation. In the case of a crisis, the issuers of stablecoins have to turn their reserves into cash right away. Such a demand for cash can be too much for the short-term bond market to bear.Large-scale selling of treasury bills leads to a drop in prices and a significant rise in yields. As a result, the financial conditions become tighter, and the cost of borrowing increases. A tale like this can sever the exit points and pass on the effects of the volatility of the US Treasury to the crypto world quickly through the interconnectedness of financial systems.The Treasury markets play a foundational role for global banking, government funding, and institutional investing. Even a slight disruption could have a chain effect, and that too a big one on global capital flows and financial stability.

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