Fall of Stablecoins Will Affect US Bond Markets: Warns Eswar Prasad

• Eswar Prasad warned that the fall of the major stablecoins could have a severe impact on the US bond markets.
• Prasad stated that the regulators are concerned about such a possibility as the issuers would have to sell US Treasury to honor redemption.
• The professor added that if there are huge redemptions, the liquidity market would be highly affected.

During the Crypto Finance Conference, at St. Moritz, Switzerland, Eswar Prasad, Professor at Cornell University warned that the fall of the major stablecoins could severely impact the US bond markets. The assumption is rooted in the fact that the issuers of these cryptocurrencies would have to sell US Treasury to honor redemptions.

Significantly, the three biggest stablecoins, Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) have increasingly become the backbone of the crypto industry. It is stated by the issuers of these stablecoins that they are backed by real assets like fiat currency, in an effort to ensure their security.

So far, there haven’t been any issues noticed regarding these stablecoins. However, Prasad said that the possibility of such a collapse is a significant issue concerning the regulators.

And I think [the] concern of regulators is if there were to be a loss of confidence in stablecoins … then you could have a wave of redemptions, which will, in turn, mean that the stablecoin issuers have to redeem their holdings of Treasury securities

Prasad added that the regulators are rightly concerned, claiming that redemptions “even in a fairly liquid market” could create turmoil in the market. He also said the liquidity in the market would have a high impact if there is “a large wave of redemptions”.

The professor further pointed out the seriousness of the issue by warning that there could be a “multiplier effect” if such a crisis were supposed to occur when the bond market sentiment was “very fragile as it is in the US right now”.