This is the new enemy of the world's financial regulatory authorities: the "stablecoins".

After bitcoin, libra – Facebook's stillborn digital currency project – the Financial Stability Board specifically takes aim at this particular class of cryptocurrencies in its report on the dangers of "crypto-assets", published on Wednesday February 16.

These stablecoins, whose "growth has been very strong in 2021 despite the many concerns associated with them", could become one of the main challenges to global financial stability, estimates this body created by the G20 in 2009. 

A bit of stability in a volatile world?

This new status as the big bad of finance may come as a surprise for a type of dematerialized currency which, originally, was created to "put a brake on the volatility of bitcoin and precisely bring a little stability to this universe", recalls Nathalie Janson, economist and cryptocurrency specialist at the Neoma Business School, contacted by France 24.

Stablecoins are, in fact, cryptocurrencies whose prices do not vary (almost) because they are indexed to a reference currency such as the dollar.

For example, a tether – the most famous and widely used stablecoin – will always be worth a dollar. 

A promise of stability that has made stablecoins, and especially tether, "the bridge between fiat currencies (dollars, euro, yuan, etc.) and cryptocurrencies", explains Vincent Boy, financial analyst and cryptocurrency experts for the firm. IG consultancy, contacted by France 24. 

Clearly, in the small world of bitcoins and other ethereums (another cryptocurrency), to avoid the constant yo-yo of the price, investors first exchange them in tether (or USD coins, or even in binance USD, to quote the main stablecoins) allowing them to know precisely the dollar value of their portfolio.

Some platforms even require you to go through a stablecoin to change cryptocurrencies into dollars or other traditional currencies.

But to guarantee this parity, the creators of these "stable" currencies must always keep in reserve an amount of dollars equivalent to the number of tokens of the stablecoin in circulation.

This is how the founders of tether – created in 2014 – assured at the end of December 2021 that they had 78.2 billion dollars in the bank to cover the 78 billion tokens in circulation.

"Systemic" risk on the horizon?

This means that "tether today has a capitalization similar to a bank", underlines Vincent Boy.

Above all, it is a sign of meteoric growth since “at the beginning of 2020 the total value of all stablecoins amounted to 5.6 billion dollars”, recalls the Financial Stability Board.

This inflation of tether is giving cold sweats to global financial authorities, including the US Central Bank which had already sounded the alarm in August 2021. "The questions that arise is how to be sure that they have well the necessary reserves and what will happen if the tether goes bankrupt", summarizes Vincent Boy. 

The growing importance of stablecoins is one of the main signs of the "democratization of investments in cryptocurrencies", emphasizes Vincent Boy.

The more people who want to exchange dollars for bitcoins, monero and others, the more the volume of transactions increases and the more stablecoins are needed in circulation.

There are therefore no longer only insiders who hold these tethers or others, “but also traditional investment funds, companies, or even banks”, lists Nathalie Janson.

This is what the Financial Stability Board calls “the growing interconnection between real economy players and the world of crypto-assets”.

The failure of one of these stablecoins would therefore cause major traders to lose money, which could, by contagion, have effects on the traditional financial markets, fear the Financial Stability Board and, also, the Fed. American.

For the time being, this is a risk to be put into perspective.

"The financial weight of stablecoins is certainly important, but the central banks still have plenty to cover losses in the event of a problem without hurting their balance sheets too much", assures Vincent Boy.

However, if tether and other stablecoins continue to grow at the same rate as in recent years, these financial tools still largely unknown to the general public could "reach systemic size (i.e., they would become 'too big too fail'", admits the IG analyst. 

Transparency and the crystal ball

But as long as the dollar reserves are well stocked, the risk of bankruptcy does not exist.

It is the other aspect of these "stable" dematerialized currencies that worries the financial authorities: "The composition and structure of these reserves vary a lot, and some players do not seem to adhere to any standard [of transparency] in this area", warns the Financial Stability Board.

In short, this authority regrets that it is necessary, more or less, to take at face value the assurances of the creators of these stablecoins on their reserves because the audits, when they are carried out, are not necessarily carried out by leading organizations or according to international standards.

Tether was still suspected three years ago of being nothing more than a vast scam.

This is not necessarily reassuring for a cryptocurrency that is central to an entire ecosystem today.

In reality, these stablecoins have made real efforts at transparency.

"What we know now is that they do not only have reserves in dollars, but also in short-term investments, which allows them to earn money," explains Nathalie Janson.

According to her, this is the heart of the problem.

"The authorities are obsessed with a new liquidity crisis like in 2008," she said.

During the subprime era, when the markets realized that the financial products offered by Lehman Brother and others were partly based on worthless assets, no one wanted them anymore, plunging these banks into the worst financial worries. . 

What if the same scenario repeats itself with stablecoins that are not 100% transparent about their reserves?

“Some may hold debt from Evergrande [the Chinese real estate giant on the verge of bankruptcy, editor’s note], for example, as has been mentioned for tether. In which case, the reserves may be worth well less, which could prevent everyone from being reimbursed if necessary", summarizes Vincent Boy.

Hence the calls from the Financial Stability Board and the Fed to regulate these stablecoins in order to impose on them obligations similar to banks.

US President Joe Biden has also called for better control of this financial wild west.

For Nathalie Janson, that would be pushing things a bit far.

“Why would you want to treat them like banks? It would be enough to impose stricter transparency obligations on them, because that is the main problem,” she says.

She suspects these authorities of wanting to put more spokes than necessary in the wheels of a tool that could compete with all the national cryptocurrency projects currently being developed in several countries.

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