The dirty little secret at the heart of crypto is that its structure is a joke. The stablecoins that purport to underpin a $3tr crypto market cap are just $130bn of opaque and dubious assets. Via the Fed’s new financial stability report:
Some stablecoins are vulnerable, and the sector continues to grow
Stablecoins are digital assets that are issued and transferred using distributed ledger technologies and are purported to maintain a stable value relative to a national currency or other reference asset or assets. The value of stablecoins outstanding has grown about fivefold over the past 12 months and stood at around $130 billion as of October 2021, based on the report published on November 1 by the President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.26 Certain stablecoins, including the largest ones, promise to be redeemable at any time at a stable value in U.S. dollars but are, in part, backed by assets that may lose value or become illiquid. If the assets backing a stablecoin fall in value, the issuer may not be able to meet redemptions at the promised stable value. Accordingly, these stablecoins have structural vulnerabilities similar to those discussed earlier for certain MMFs and are susceptible to runs. These vulnerabilities may be exacerbated by a lack of transparency and governance standards regarding the assets backing stablecoins. The potential use of stablecoins in payments and their capacity to grow can also pose risks to payment and financial systems.
In effect, stablecoins pretend to be the central bank for crypto but nobody knows what they secure this claim with. We don’t even know who they are!
That this is then repackaged as “real money” or “gold” or whatever other unassailable assets that can be concocted is so weird that I don’t know where to look.
What this says to me is that when the next monetary crisis comes and a stablecoin inevitably “breaks the buck”, then the entire crypto universe will crash with such ferocity that it will very seriously exacerbate whatever the underlying crisis is.
The irony is obvious. While claiming to be the new safe haven, crypto is in truth only adding enormous leverage to an already overburdened monetary system. It’s a gaslighting currency, claiming the high moral ground while destroying that very earth.
But, if the crypto market runs for a few more years and doubles again, these are the kinds of dynamics that lead to “too-big-to-fail” monetary innovation in which central banks create all sorts of facilities and funds to buy and support the value of crashing asset prices.
Will the Fed be forced to do the same as with crypto? What if some major bank has leveraged itself via crypto in some way? The longer the parasite is allowed to feed upon the vulnerabilities of the host, the more likely that this becomes.
In one way it would a hilarious outcome, as the libertarian universe scuttled under the skirts of the centralised fiat currency it aims to destroy. I am sure it would have no problem repackaging that as success.
In another way, it will not be funny at all because bailout or not, crypto is going to cost everybody a lot more money than otherwise in the next crisis.
Hopefully, sanity will prevail and no matter what it costs central banks or the financial system, stablecoins will be allowed to burn to the ground.
