Encryption has brought its claws into the White House and has rapidly evolved into a global financial stability risk.
So far, what's going on in cryptocurrencies has remained in cryptocurrencies. If you buy some kind of symbol - thousands of things in it are linked to everything from dog memes to the president of the United States - something goes wrong, it's on you. If the website you store them goes bankrupt or gets hacked, luck is tough - you know the risks.
“Hey, crypto mom, where is my bailout?” As the SEC said to crypto-friendly specialist Hester Peirce in May, this is not an appropriate response to the losses suffered.
However, we are quickly reaching the point where the crypto ecosystem poses a risk to the mainstream market, or the cryptocurrency community calls it "Tradfi." In fact, it is reaching everyone, the U.S. government debt – the bedrock of the global financial system.
The connective tissue here is stable between dog tokens and real life, similar to the ordinary currency, mainly the US dollar, but in the crypto ecosystem. By using Tether or Circle's USDC as the basis, rather than a clumsy real-world currency, it's easier to get into Bitcoin or other tokens.
With Stablecoins, the promise is one dollar is one dollar. They should have been based on reserves of equal value. Holders receive no interest (but operators usually receive billions of dollars in annual gains) or any adjustments to inflation. But they can really easily shoot something that smells a little like real money.
This has been an interesting trash on the global financial periphery for years. Stablecoin operators have shown that there are varying degrees of willingness to articulate what they have, and that the tethered executive Paolo Ardoino once told the Financial Times that it was his "secret sauce".
As early as 2021, the warning emerged with the risks this brought to the general market. Rating agency Fitch notes that if someone folds for any reason, it may be forced to sell all its shares - dollar assets in the reserves - that puts the basic market downside.
Last month, a working paper from the International Settlements Bank Bank, Central Bank, increased the number of the warning. In it, Rashad Ahmed and Iñaki Aldasoro calculated that Stablecoins (Tether is by far the largest and most influential) borrowed funds and stirred it into reserves, which had a significant impact on the short-term value of U.S. government debt.
This is a reassuring sign that Stablecoin operators are indeed buying reserves to match their inflows. Nevertheless, this is a little-known market force. According to the researchers, a $3.5 billion inflow in five days could put enough upward pressure on the price of short-term government debt in the U.S. to increase yields by 0.025 percentage points in 10 days.
That doesn't sound like much, but the paper says it's "compared with long-term yields" which is the same as central banks' efforts to stimulate the iconic economy.
So this covers when the Stable currency comes in. But what happens when it goes out is even more important: The impact on short-term government debt prices is two to three times greater. When money comes in, Stablecoin operators can exercise some discretion on how and when to buy reserves. When they face salvation, they must take a faster attitude.
We may cheer for the rise of Stablecoins, a side effect of the Trump family’s ruthless encryption as it helps reduce profit margins on borrowing costs. (Although people can cut the intermediaries, buy short-term debt and enjoy interest payments may be preferable.) But if there is any problem in future cryptocurrencies - hardly a wild theoretical exercise, we may all feel the ripple effect. Either way, all of this adds a layer of complications to the central bank.
"If the stable industry continues to grow rapidly, it may eventually affect the transmission of monetary policy," the researchers said. ”
It is obvious that all this embedded in the risks of financial stability as the United States tries to promote Stablecoins growth. Stablecoin operators have more U.S. debt securities than large foreign investors such as China. Between them, they purchased Treasury bills worth more than $40 billion in 2024.
This moment requires heavy regulatory requirements for Stablecoin operators to report in detail what they are buying and selling. But crypto-regulatory and law enforcement situations under the second Trump administration show that this is absolutely impossible. We will not be surprised to see the impact of this space when Trump is in the office or later.
katie.martin@ft.com