Professor Cornell Warns of US Bond Market Disruption Due to Potential Collapse of a Major Stablecoin Cointelegraph

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A Cornell University professor has warned of the potential effects that the collapse of a major stablecoin could have on the US bond market. Eswar Prasad said that if large stablecoins were to crash, the number of Treasuries they would have to sell could disrupt the US Treasuries market, affecting prices.

Cornell Profesor Warns of Danger of Stablecoin Collapse

Eswar Prasad, an economics professor at Cornell University, has warned of the potential damage a bank run over a possible collapse of a major stablecoin could do to the mainstream financial system in the United States. Although the most recent collapse of the crypto-economy did not affect legacy financial structures, Prasad believes that stablecoins and their operations pose risks in this regard.

In an interview with CNBC, Prasad argued that stablecoins use US Treasuries as a backup to maintain peg value. In the event that one of the major stablecoins in the market faces a meltdown or bank run, these organizations would have to redeem those bonds to process their own redemptions, affecting the treasury bill market.

Prasad said:

A large volume of redemptions, even in a relatively liquid market, can create market turbulence in the underlying securities. And given the importance of the Treasury securities market to the entire US financial system, I think regulators are rightly worried.

According to their report, the three major stablecoins have a large number of US bonds in their treasuries. According to reports published in November, the issuers of Circle, Tether and Paxos, issuers of the three main stablecoins in the crypto market, are believed to own nearly $60 billion in US Treasuries.

Incoming settlement

Although a clear regulatory framework for stablecoins in the United States has yet to be established to address potential issues of their collapse, regulation may be on the horizon. In December, Republican Senator Pat Toomey introduced the “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022,” also known as the TRUST Act, in an effort to regulate stablecoin operations without hampering innovation.

Additionally, recently, the U.S. House Committee on Financial Services created the “first-ever” Subcommittee on Digital Assets, Fintech, and Inclusion, with the goal of providing clear rules. for the digital cryptocurrency ecosystem, which may also include stablecoins in the future.

The stablecoin market was rocked in 2022, when one of the top five algorithmic stablecoins, UST, crashed and fell from a capitalization of around $10 billion in January to just $215 million in December.

Tags in this story Circle, cnbc, cornell, Eswar Prasad, pat toomey, Paxos, Stablecoins, Tether, Treasuries, TRUST stablecoin act, US bonds, USDC

What do you think of concerns about the effect of a run on stablecoins on the US bond market? Tell us in the comments section below.

Sergio Goschenko

Sergio is a cryptocurrency journalist based in Venezuela. He describes himself as late in the game, entering the cryptosphere when the price spike happened in December 2017. Having a background in computer engineering, living in Venezuela and impacted by the cryptocurrency boom at the social, it offers a different point of view. on the success of crypto and how it helps the unbanked and underserved.

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