Stablecoin collapse may affect U.S. bond market, economist warns

Economist Eswar Prasad warned {that a} financial institution run on Stablecoins may fallout into the U.S. bond markets if issuers promote U.S. Treasurys to honor redemptions.

Prasad warned that if a financial institution run ought to happen whereas bond market sentiment stays “very fragile,” there might be a “multiplier impact” resulting from immense promoting stress on Treasurys.

“A big quantity of redemptions even in a reasonably liquid market can create turmoil within the underlying securities market. And given how vital the Treasury securities market is to the broader monetary system within the U.S. … I believe regulators are rightly involved.”

Stablecoins resembling Tether (USDT) are backed by billions of {dollars} in reserves to accommodate mass-redemptions situations, in line with USDT’s November 2022 report.

Nonetheless, Prasad warned regulators that if many customers attempt to redeem their Stablecoin for fiat, issuers resembling USDT must unload their belongings of their reserve.

“You probably have a big wave of redemptions that may actually damage liquidity in that market.”

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