- Everyone is jumping on the stablecoin bandwagon
- Potential to grow substantially but serious macroeconomic consequences
- Negative yields another risk facing stablecoins
- Stablecoins are all the rage in 2019.
The fast-growing fiat currency backed digital currencies, that are designed to mitigate the large fluctuations of cryptocurrencies, could fail to work properly in the period of stress, as per JPMorgan Chase & Co.
Jumping on the Stablecoin Bandwagon
The largest US bank created its own stablecoin, JPM Coin earlier this year, which is “designed to make instantaneous payments using blockchain technology.”
Another bigwig in this game is social media giant Facebook whose Libra is facing criticism from the authorities from all over the world.
Recently, the leading crypto exchange Binance also jumped on the stablecoin bandwagon with the launch of its dollar-backed stablecoin in the US and received New York Department of Financial Services (NYDFS) for the same as well.
The growing competition in the stablecoin market has started to hurt other stablecoins.
Potential to grow substantially but serious macroeconomic consequences
As can be seen, despite the combined value of stablecoins in the cryptocurrency market being less than $5 billion, the low-volatility tokens are poised for rapid growth.
However, they are still vulnerable to seizures and bottleneck as they lack the short-term liquidity facilities present in other payments systems, reported the analysts.
This means, there is a risk that activity in these coins will grow faster than they can actually manage.
“Stablecoins, and Libra in particular, have the potential to grow substantially and ultimately shoulder a significant fraction of global transactional activity,” the analysts said on Thursday.
“However, as currently designed and proposed, they do not take into account the microstructure of operating such a payment system. The risk of payment system gridlock, particularly during periods of stress, could have serious macroeconomic consequences.”
Negative yields another risk in front of stablecoins
Another danger facing these stablecoins is negative yields.
“Any system that relies on reserve-asset income to fund operational and other ongoing costs becomes unstable in a negative yield world,” said the analysts.
Being fiat-backed Libra and other stablecoins rely on income from the collateral in the reserve account to pay for maintaining the network and rewarding association members.
“With more than half of high-quality short-term sovereign debt already negative, the vast majority of the remainder made up of U.S. government securities, and trends pointing towards global monetary easing, a fully negative yielding Libra reserve has become a plausible (some would argue likely) risk.”