In the recent Unchained Podcast, “the block ghost of BitMEX”, Arthur Hayes said fiat-backed stablecoins like the USDC, USDT, and others pose a risk to the bonds market, and this is the primary concern for the United States.
Stablecoins make the bonds market fragile, USDC de-pegs
Arthur specifically pointed out the architecture of fiat-backed stablecoins and the need for the issuer to custody user funds before investing them in bonds, mostly in United States Treasuries, where they earn a yield.
This flow of funds to Treasuries makes the United States bonds market fragile.
Because stablecoin issuers claim that each token in circulation is backed 1:1 with the USD reserved in cash or cash equivalents like short-term treasuries, any spike in demand in redemption requisition will heap pressure on the bonds market, even placing it under duress.
Following the collapse of the Silicon Valley Bank (SVB), there has been a spike in USDC to USD/stablecoin conversion, forcing the Circle-issued token to de-peg.
As of writing on Mar. 11, the stablecoin traded at $0.96 to the USD.
Circle has been forced to meet redemption demands, yet an estimated 75% of their total reserve at approximately $40b is held in short-term Treasuries. Circle will have to sell their bonds for fiat and reimburse clients, impacting the bonds market.
Treasuries are critical to the global financial system
The United States, more like other world governments, continuously issue bonds to fill deficits in their federal budgets. Besides, the bond market can be used to implement monetary policy. The bonds market is critical to the global financial system, and any impact may have a multiplier effect.
Entities, primarily banks and financial institutions like Circle or Tether Holdings that issue stablecoins, purchase these bonds, and in return, they earn a yield. This is because the United States government bonds are considered risk-free, and committing banks and institutions don’t have to worry about defaults.
Funds received are then used to finance various government-initiated projects, including infrastructure spending and more.
While stablecoin issuers have to purchase government bonds, Janet Yellen, following the collapse of USDT in 2022, said stablecoins were a risk to financial stability.
