Stablecoin Collapse Could Impact US Bond Market, Economist Warns

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Economist Eswar Prasad has warned that a run on stablecoins could ripple through U.S. bond markets if issuers sell U.S. Treasuries to honor redemptions.

Prasad warned that if a bank run occurs as bond market sentiment remains “very fragile”, there could be a “multiplier effect” due to the immense selling pressure on Treasuries.

“A large volume of redemptions, even in a relatively liquid market, can create market turbulence for the underlying securities. And given the importance of the Treasury securities market to the entire financial system in the United States… I think regulators are understandably concerned.

Stablecoins such as Tether (USDT) are backed by billions of dollars in reserves to deal with massive redemption scenarios, according to USDT’s November 2022 report report.

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

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

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