Stablecoin collapse could impact U.S. bond market, economist warns

Economist Eswar Prasad warned that a bank run on Stablecoins could fallout into the U.S. bond markets if issuers sell U.S. Treasurys to honor redemptions.

Prasad warned that if a bank run should occur while bond market sentiment remains “very fragile,” there could be a “multiplier effect” due to immense selling pressure on Treasurys.

“A large volume of redemptions even in a fairly liquid market can create turmoil in the underlying securities market. And given how important the Treasury securities market is to the broader financial system in the U.S. … I think regulators are rightly concerned.”

Stablecoins such as Tether (USDT) are backed by billions of dollars in reserves to accommodate mass-redemptions scenarios, according to USDT’s November 2022 report.

However, Prasad warned regulators that if many users try to redeem their Stablecoin for fiat, issuers such as USDT would have to sell off their assets in their reserve.

“If you have a large wave of redemptions that can really hurt liquidity in that market.”

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