Stablecoin Issuers May Disrupt Money Markets


Stablecoin issuers risk disrupting the short-term funding market after… Fed restricted access to it. JPMorgan came to this conclusion, writes Bloomberg.

In April 2023, the Federal Reserve excluded counterparties from reverse repurchase transactions. overnight (RRP) funds created for the sole purpose of gaining access to this mechanism.

The decision means that stablecoin issuers will now have to compete with the $5.64 trillion money market fund industry for assets such as Treasury bills, potentially driving those rates below RRP levels (currently 5.3%).

“While the ban makes sense from a financial stability perspective, it potentially risks undermining the already lenient floor on money market rates that the Fed enforces through the RRP.” – the document says.

Analysts explained that the facility provides a safe and attractive place for money market funds, banks and other counterparties to “stay money” overnight.

It offers a stable, known rate tied to Fed policy benchmarks that is often higher than many money market alternatives like Treasury bills or market repos.

Until the US Treasury began actively placing T-Bill, counterparties placed more than $2 trillion in Fed accounts. Since then, use has fallen by about $723 billion as money market funds moved funds into Treasury bills and market repo.

The shift slowed in mid-July as other investors crowded out cash funds amid 5% yields.

The combined reserve portfolio of USDT and USDC issuers as of June 2023 was $114 billion, of which more than 60% was in bills and 25% in repos.

This amount is equivalent to just 2% of the T-Bills market, but, according to strategists, additional growth in the capitalization of “stable coins” could crowd out other buyers and increase the imbalance in supply and demand. The resulting shortage of Treasury bills and repos will be reflected in an even greater reduction in rates.

Analysts noted the growing impact of events in the cryptocurrency market on TradFi. They cited the TerraUSD crash in May 2022, which demonstrated how quickly a surge in the short-term betting segment could occur.

A rapid and massive liquidation of other high-quality liquid assets such as T-Bill by one stablecoin issuer could impact the net asset value of other issuers and money market funds holding the notes, leading to even more liquidations, the experts pointed out.

“Although this is an unlikely event risk, the cryptocurrency market is susceptible to it. Any mass liquidation would likely be limited to dealers’ balance sheets and their processing capabilities, which could also impact NAV other stablecoin issuers and other liquidity holders”, – the experts concluded.

Let us remind you that analysts Federal Reserve Bank Boston and New York saw “stable coins” as a threat to financial markets.

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