Stablecoins Risk US Treasury Fire Sale: BIS Paper

The $250 billion stablecoins market has become a significant player in shaping prices for the world’s ultimate safe haven, with inflows and outflows affecting the cost of short-term borrowing for the US government already, notwithstanding expectations for the space to balloon further.

This is according to a working paper published by the Bank for International Settlements that found that the ebbs and flows of appetite for stablecoins is already influencing yields on 3-month US government debt, with “a concerning skew towards negative outcomes”. While inflows into the stablecoin space lower yields by up to 2.5 basis points, outflows can raise the cost of borrowing for the US administration by as much as 8bps.

“These results suggest that stablecoins have already established themselves as significant players in Treasury markets. Their growth blurs the lines between cryptocurrency and traditional finance and carries implications for monetary policy, transparency of stablecoin reserves and financial stability – particularly during periods of market stress,” authors Rashad Ahmed and Inaki Aldasoro write.

Stablecoins are dominated by two large players, Tether’s USDT and Circle’s USDC. Last year, Tether was the seventh largest buyer of US Treasuries, outpacing countries such as Mexico and Canada. Their rapid growth has been attributed to playing a growing role in cross-border transactions as payments companies and other financial market players move to adopt them. In the past 12 months, the market capitalisation of stablecoins grew 140%, and there are few signs of a let up.

Citigroup analysts recently estimated that the stablecoin market could reach $1.6 trillion in a base case scenario by 2030. The bank’s bull scenario puts the projected market cap at $3.7 trillion. Meanwhile, the US Treasury Borrowing Advisory Committee chose to believe an estimate from Standard Chartered that puts market cap at $2 trillion by 2028.

The BIS paper warns that continued rapid growth could have significant implications for monetary policy transmission, the availability of high-quality collateral and financial stability.

“Concerning monetary policy, our yield impact estimates suggest that if the stablecoin sector continues to grow rapidly, it may eventually affect the pass-through of monetary policy to Treasury yields,” the authors state. “Stablecoins’ growing footprint in Treasury markets may also contribute to safe asset scarcity for non-bank financial institutions, potentially affecting the liquidity premium.”

The paper also emphasises financial stability risks, noting that stablecoins are “runnable” while their balance sheets are subject to liquidity, interest rate and credit risks. “As such, concentrated positions in T-bills, particularly those which are not set to immediately mature, may subject the market to fire sales if a major stablecoin were to face severe redemption stress, not least given the absence of discount window or lender-of-last-resort access,” the authors write.

They further warn that their estimates for the downside might be on the lower side and, as is standard in such academic papers, recommends further research into cross-border spillovers and interactions with money market funds, particularly during liquidity crises.