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Bank Run on Stablecoins Could Create Multiplier Effect on US Bonds

• 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 recently warned regulators that a bank run on Stablecoins could have a significant effect on the U.S bond market, due to the fragility of current market sentiment. Stablecoins are cryptocurrencies which are designed to maintain a consistent and steady value, and are backed by a reserve asset such as U.S. Treasurys. If a bank run should occur on Stablecoins, Prasad warned that the selling pressure on Treasurys could create a “multiplier effect”, leading to a sharp decrease in liquidity in the underlying securities market.

Tether (USDT), one of the leading Stablecoins, is backed by billions of dollars in reserves to accommodate mass-redemptions scenarios. USDT’s November 2022 report has outlined how the reserve asset works to maintain the value of the Stablecoin, and to prevent any significant losses for those who hold it. However, Prasad warned that if many users try to redeem their Stablecoin for fiat, issuers such as USDT would have to sell off their assets in their reserve. This could create a significant amount of selling pressure on Treasurys, which could lead to a decrease in liquidity in the market.

Prasad’s warning has come at a time when the U.S bond market is particularly fragile, and a bank run on Stablecoins could have a catastrophic effect. Regulators have been warned to take action to prevent any potential bank runs on Stablecoins, and to ensure that the underlying securities market remains stable. Prasad’s warning has highlighted the importance of the U.S bond market, and the potential implications of a bank run on Stablecoins for the global economy.