Economist Eswar Prasad has warned that a bank run on stablecoins could hurt US bond markets if issuers sell US Treasuries to honor the redemptions.
Prasad warned that if a bank run were to occur while bond market sentiment remains “very fragile”, there could be a “multiplier effect” due to the immense selling pressure on Treasuries.
“A large volume of redemptions, even in a fairly liquid market, can lead to confusion in the underlying stock market. And given the importance of the Treasury market to the broader US financial system, I think regulators are rightly concerned.”
Stable coins like Tether () are backed by billions of dollars in reserves to accommodate massive redemption scenarios, according to USDT November 2022
However, Prasadaregulators that if many users try to redeem their stablecoin for fiat, issuers like USDT would have to sell their assets in their reserve.
“If you have a big wave of redemptions, that can really hurt liquidity in that market.”
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