Potential Financial Crisis Warning Amidst Stablecoin Growth
As stablecoins gain significant traction on a global scale, Nobel Laureate Economist Jean Tirole has expressed serious concerns over the sector’s lack of adequate regulation. His insights highlight the possible repercussions of insufficient oversight, which could trigger a financial crisis.
Economist Cautions Against Potential Financial Catastrophe
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On a recent occasion, Jean Tirole articulated his apprehension regarding the intensifying momentum of stablecoins and the inadequate regulatory framework surrounding them. In a discussion with the Financial Times, the esteemed professor from the Toulouse School of Economics voiced his fear of governments potentially facing “multibillion-dollar bailouts” should these digital currencies, perceived by many retail traders as “perfectly safe deposits,” falter in a financial downturn.
Tirole further highlighted the risks associated with stablecoins backed by US government bonds, noting their historically low yields. This backdrop includes instances where Treasury debt returns were negative, thus diminishing payouts in real terms after accounting for inflation. The enactment of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act in July mandates that stablecoins pegged to the US dollar must be supported on a one-to-one basis by US dollars or Treasury bills.
Reportedly, US Treasury Secretary Scott Bessent is optimistic about the burgeoning crypto sector’s potential role as a significant buyer of US Treasuries. In line with this, Bessent has reached out to top stablecoin issuers such as Circle and Tether for insights, indicating the Treasury’s plans to increment short-term bill sales in upcoming quarters. However, Paul Donovan, the Global Chief Economist at UBS, remains skeptical about the sector’s impact on the demand for US government bonds. He argues that stablecoins mainly redistribute the money supply rather than altering the demand for US debt instruments.
Enhanced Regulation for Stablecoins: A Necessity
In light of the global surge in stablecoin use, the market has expanded to exceed $280 billion. Goldman Sachs recently described this phase as the “beginning of a stablecoin gold rush,” with the potential to escalate the market into trillions of dollars. Tirole warned that stablecoin issuers might be tempted to invest in riskier assets offering higher returns, which could precipitate a crisis.
He elaborated that if these assets are perceived as safe by retail or institutional depositors, the government might face immense pressure to safeguard depositors’ funds, akin to the rare losses experienced by uninsured depositors of traditional banks over the decades. The economist believes that to mitigate these risks, global regulators must have adequate resources and incentives to act diligently. Yet, he cautioned that personal and political interests among key administration members pose challenges.
Conversely, US Treasury Secretary Bessent holds that the recent regulatory measures are sufficient to propel the sector forward. He asserted, “The GENIUS Act provides the fast-growing market with the regulatory clarity it needs to evolve into a multitrillion-dollar industry.”
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