Will Specter of Public Runs and More Regulation Blunt Stablecoins’ Use in Commerce?

Stablecoins need more regulation.

Stablecoins might, in some cases, cause runs.

And as government officials and financial institutions (through the Bank for International Settlements) sound some alarms about stablecoins, it remains to be seen whether the digital holdings will satisfy some of the key use cases that have been touted in the past:

Namely, as instruments of commerce, particularly cross-border transactions.

As reported Tuesday (Feb. 6), U.S. Treasury Secretary Janet Yellen appeared before the House Financial Services Committee and said that there remain concerns about stablecoins. The testimony offered to the committee, as referenced here, states that the Financial Stability Oversight Council, in monitoring various risks, “has focused on digital assets and related risks such as from runs on crypto-asset platforms and stablecoins, potential vulnerabilities from crypto-asset price volatility, and the proliferation of platforms acting outside of or out of compliance with applicable laws and regulations.”

In addition, in charting a path forward, Yellen said that “applicable rules and regulations should be enforced, and Congress should pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.”

This last point, the distinctions for digital holdings that are “not securities” spotlights the changes that might loom for the cryptos and coins that are holdings meant to be tied to stores of value and/or to be used to, well, buy things.

Transparency and Volatility

Separately, the Bank for International Settlements said in a paper titled “Public Information and Stablecoin Runs,” released at the end of last month, that “Public information disclosure has an ambiguous effect on run risk: greater transparency can lead to increased (reduced) run risk for sufficiently low (high) stablecoin holders’ priors about reserve quality or transaction costs of conversion to fiat.” The paper, we note, underscores the double-edged sword of transparency, and notes that during times of financial stress, volatility is a hallmark.

The authors offered up the turmoil seen during the Silicon Valley Bank collapse nearly a year ago. Circle held billions of dollars in cash reserves with SVB, and its USDC coin broke what is commonly known as its peg — trading below the value of the 1:1 ratio to the U.S. dollar. And, the BIS said, par convertibility may be resilient to “small shocks,” but that resilience fails where there remain “large negative public shocks.”

The Fed, exactly two years ago, posited in a blog titled “The Future of Payments is Not Stablecoins” that the reserve backing of stablecoins can tie up assets and reduce liquidity, and that tokenized deposits may be a better option. PYMNTS data at around the same time noted that more than a third of firms mulling the embrace of blockchain and crypto/stablecoin solutions, especially cross-border, would be risky, 28% said they were not comfortable with this approach; and only about 36% said they were “extremely or very comfortable” with those initiatives.