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According to a recent Bank of International Settlements (BIS) working paper, a bank run on a major stablecoin issuer could cause “potential fire sales” in short-dated Treasuries.
Researchers claim that stablecoin issuers’ pricing impact on the world’s largest bond market is “already measurable” and given the tame environment of steadily bullish growth on which they based their analysis, “is likely to be a lower bound of potential fire sale effects.”
In other words, because data available to BIS researchers is orderly, linear data from many years of stable market environments, estimates of stablecoins’ impact on Treasuries are necessarily conservative.
During an event of “severe stress” such as a bank run on a major stablecoin issuer — which hasn’t occurred in recent history — researchers note, “non-linear effects” could quickly emerge and cascade into a “potential fire sale” for three-month Treasuries.
Treasuries are the most valuable and liquid bond market in the world. Indeed, financing the US gross national debt of $37 trillion, there are $29 trillion in outstanding US Treasury bills, notes, TIPS, and bonds.
When people refer to Treasuries, they generally mean all of these marketable debt securities issued by the US Department of the Treasury.
Donald Trump says stablecoins strengthen Treasuries, national security
As stablecoins have graduated as an asset class, their impact on this bond market has become indisputable.
Even Donald Trump praised their effect on US Treasuries in a speech as recently as July 18, claiming that they strengthen the US dollar’s reserve currency status and improve national security.
Indeed, with $268 billion in market capitalization and growing quickly, researchers are starting to analyze the potential for panic in sovereign debt markets if stablecoin giants like Tether (USDT) or Circle (USDC) were to ever collapse.
Interestingly, researchers have already discovered that outflows from stablecoins — i.e. redemptions of USDT or USDC by customers — have asymmetric effects to inflows.
Specifically, outflows raise three-month Treasury yields by “two to three times as much as inflows lower them,” according to the analysis.
In other words, exiting stablecoin customers have up to three times the impact of entering stablecoin customers — even under normal, safe, stable market conditions.
Researchers warn the outsized effect of outflows could rise non-linearly, i.e. parabolically, under a bank run scenario.
Read more: PayPal and Ripple stablecoins still sub-1% despite ‘stablecoin gold rush’
Tracking the impact of stablecoins on US Treasuries
The impact of stablecoin inflows on non-stablecoin asset prices like bitcoin (BTC) is well-known, yet this research paper is one of the first to analyze the impact of stablecoins on Treasuries.
Although researchers conclude that their impact is modest under current market conditions, their effect is measurable and potentially parabolic — especially given the outsized impact of outflows relative to inflows.
To be sure, Treasuries are a $29 trillion market and dwarf the $268 billion worth of stablecoins outstanding.
The pricing impact of stablecoins on Treasuries is measurable only in 2-2.5 basis points, according to the researchers, equating to less than 0.03%.