In a recent Unchained Podcast, Arthur Hayes, “BitMEX Block Ghost,” said fiat-backed stablecoins like USDC, USDT, etc. pose risks to the bond market, which is a top concern for the United States. I said yes.
Stablecoins Make Bond Markets Weak, USDC Unpegs
Arthur specifically points to the architecture of fiat-backed stablecoins and the need for issuers to store user funds before they can be invested in bonds, primarily yielding yields on US Treasuries. obtain.
This flow of money into the Treasury has made the US bond market vulnerable.
Stablecoin issuers claim that each token in circulation is backed 1:1 with US dollars secured by cash or cash equivalents such as short-term government bonds, thus increasing demand for redemption. A surge in volatility puts pressure on bond markets and can even force them.
After the collapse of the Silicon Valley Bank (SVB), a surge in USDC to USD/stablecoin conversion forced the Circle issued token to be de-pegged.
At the time of writing on March 11, the stablecoin traded $0.96 against the US dollar.
Circle has been forced to meet redemption demands, but an estimated 75% of its total reserves of about $40 billion are held in short-term Treasury bills. Circle must sell bonds for fiat currency and repay clients, impacting the bond market.
Government bonds are vital to the global financial system
The United States, like other world governments, continues to issue bonds to fill federal budget deficits. Also, bond markets can be used to implement monetary policy. Bond markets are critically important to the global financial system, and any impact can have synergies.
Mostly banks and financial institutions that issue stablecoins, such as Circle and Tether Holdings, buy these bonds and earn yield in return. This is because U.S. government bonds are considered risk-free and banks and institutions do not have to worry about default.
The funds received will be used to finance various government-initiated projects, including spending on infrastructure.
Stablecoin issuers must buy government bonds, but Janet Yellen warns that after the USDT collapse in 2022, Said Stablecoins have been a risk to financial stability.