In the recent Unchained Podcast, “BitMEX Block Ghost”, Arthur Hayes said that fiat-backed stablecoins like USDC, USDT and others pose a risk to the bond market, and this is the main concern for the United States. .
Stablecoins Make Bond Market Fragile, USDC Decouples
Arthur specifically pointed to the architecture of fiat-backed stablecoins and the need for the issuer to secure user funds before investing them in bonds, primarily US Treasuries, where they earn a return.
This flow of funds into Treasuries makes the US bond market fragile.
Because stablecoin issuers claim that every token in circulation is backed 1:1 with the USD set aside in cash or cash equivalents like short-term Treasuries, any increase in demand on the redemption request will add to the pressure. on the bond market, even placing it under duress.
Following the collapse of Silicon Valley Bank (SVB), there has been an increase in the conversion of USDC to USD/stablecoin, forcing the Circle-issued token to de-peg.
At the time of writing on March 11, the stablecoin negotiated at $0.96 per USD.
Circle has been forced to meet the redemption demands, however an estimated 75% of its total reserve of approximately $40 billion is held in short-term Treasuries. Circle will have to sell its bonds for fiat money and repay clients, which will hit the bond market.
Treasury bonds are critical to the global financial system
The United States, much like other world governments, continually issues bonds to cover deficits in its federal budgets. Also, the bond market can be used to implement monetary policy. The bond market is fundamental to the global financial system and any impact can have a multiplier effect.
Entities, mainly banks and financial institutions like Circle or Tether Holdings that issue stablecoins, buy these bonds and earn a return in return. This is because US government bonds are considered risk free and committed banks and institutions do not have to worry about defaults.
The funds received are then used to finance various projects initiated by the government, including infrastructure spending and more.
While stablecoin issuers have to buy government bonds, Janet Yellen, following the USDT collapse in 2022, saying stablecoins were a risk to financial stability.
