Tobias Adrian – Director of Monetary and Capital Markets for the IMF – thinks crypto may still have blood left to lose. He recently warned that crypto markets may continue to decline while more coin offerings, such as stablecoins, fail like Terra.
No Stablecoin is Safe
Speaking in an interview with Yahoo Finance published on Wednesday, Adrian said selloffs across both crypto and equities may continue. The dropoff would be even harder in the event of a recession.
“There could be further failures of some of the coin offerings — in particular, some of the algorithmic stablecoins that have been hit most hard, and there are others that could fail,” he added.
The Federal Reserve bumped up its policy rate by another 75 basis points on Wednesday and plans to continue tightening. Though its actions have driven down both stocks and crypto in recent months, Bitcoin and the S&P appear to have rallied following the latest hike.
The response may be a sign of relief that the Fed didn’t hike by 100 basis points, rather than a general recovery. Alternatively, it could be mimicking its behavior in May when Bitcoin rose shortly after FOMC but plummeted to $30k days later.
If a pullback indeed occurs, the Director thinks more Terra-style bank-run stablecoin collapses could follow. In May, Both LUNA and the TerraUSD (UST) stablecoin collapsed to zero due to a death spiral spurred by their faulty peg mechanism. Too many holders tried to redeem their UST at once, tanking LUNA, UST, and investors’ faith in the ecosystem.
Yet Adrien believes even non-algorithmic stablecoins backed by fiat contracts are at risk:
“There’s some vulnerability there, because they’re not backed one to one,” he said, referencing Tether. “[Some fiat-backed stablecoins] are backed by somewhat risky assets…it is certainly a vulnerability that some of the stablecoins are not fully backed by cash-like assets.”
Adrien added that stablecoins backed by raw cash are least vulnerable to a bank run.
How Are Stablecoins Doing?
Each of the current top 3 stablecoins appears to hold relatively reliable reserves – at least according to their latest attestations. Both Circle’s USDC and Binance’s BUSD were reportedly backed solely by cash and US Treasuries as of June 30th.
Tether is yet to release a Q2 report, but gave attestation for fully backed reserves in Q1. CTO Paolo Arduino claims the firm has massively reduced its reliance on commercial paper since that time.