According to Brendan Malone, an ex- Federal Reserve Board analyst, dollar-pegged stablecoins may be less dangerous to retain than conventional bank deposits.
As per Malone, Stablecoins are fundamentally less vulnerable to a bank run than actual banks. This is because issuers of stablecoins manage their reserves with greater discipline.
The expert stated that the reserve assets “might match the stablecoins outstanding one-to-one, comprising central bank liabilities or short-dated Treasuries, which were separated from the issuer’s own assets, safeguarded from creditor process and liable for assessments or audits.”
Blockchain-based tokens known as stablecoins have their value tied to a fiat currency or other “stable” asset, most often the US dollar.
Notably, under certain conditions, they enable users to profit from the effectiveness of blockchain transfers and services without being subjected to the infamous volatility of widely used cryptocurrencies like Bitcoin (BTC) and Ether (ETH).
Apart from this, with a combined worth of more than $100 billion, USDT and USD Coin (USDC) from Circle and Tether are now the two biggest stablecoins on the market. Both coin issuers publish periodic disclosures on the makeup of their reserves, which typically only include short-term government debt and cash.
Banking, on the other hand, can be “highly risky” due to the fact that banks frequently use consumer deposits to invest in longer-term assets.
In the event of a shortage of deposits, a bank may not be able to accommodate all withdrawal requests if the face value of those assets significantly decreases in the short term.
This is exactly what happened for Silicon Valley Bank (SVB) when it defaulted in March. Depositors left the bank as soon as it was revealed that it had sold its long-duration bonds for a $1.8 billion net loss.
Moreover, Circle’s USDC also lost its peg to the dollar at that time since the issuer held more than $3 billion of its assets in the form of bank deposits at SVB.
Malone continued, “The stablecoin framework for risk management should be developed to address the specific risks connected with stablecoins, which are distinct from those that occur in conventional banking.”
The Clarity for Payment Stablecoins Act of 2023 is one of the first bills with a focus on cryptocurrencies that may become law in the United States.
However, the committee’s chair, Patrick McHenry, claimed that the White House had rushed the vote and had not offered enough of a concession in the bill’s conversations.
Only three Democrats voted in favour of the 29-21 outcome, which almost entirely followed party lines. If the bill makes it to the Democratic-controlled Senate, the lack of support from both parties may prove to be a barrier.
