Bank Run on Stablecoins Could Have Devastating Impact on US Bond Market

• Economist Eswar Prasad has warned regulators that a bank run on Stablecoins could have significant impact on the U.S bond markets.
• 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.
• 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.

Economist Eswar Prasad has sounded the alarm on the potential risks of a bank run on Stablecoins and its potential impact on the U.S. bond market. In a warning to regulators, Prasad outlined the potentially devastating consequences of a mass-redemption scenario, citing the likely “multiplier effect” on Treasurys due to the fragile sentiment of the bond market.

Stablecoins are digital assets backed by real-world assets such as fiat currency, gold, or other commodities. Tether (USDT), the most prominent of these, is backed by billions of dollars in reserves, ensuring that users can redeem their coins for fiat currency in the event of a bank run.

However, Prasad warned that such a situation could still have dire implications. A large-scale redemption would likely require USDT to sell off its reserves, resulting in a significant sell-off of U.S. Treasurys and a sharp drop in bond prices. This could create a “multiplier effect” on Treasurys, leading to a ripple effect throughout the financial system.

Prasad noted that the impact of such a scenario could be felt beyond the U.S. bond market. Given how interconnected the global financial system is, a bank run on Stablecoins could lead to a domino effect of selling pressure on markets around the world.

As such, Prasad concluded that regulators should be taking the potential risks of a Stablecoin collapse seriously, and taking steps to ensure that such a situation is avoided. However, given the sheer size of the U.S. Treasurys market, it may be difficult for regulators to mitigate the impact of a mass-redemption scenario.