Many will read this plan outlined by economic secretary to the Treasury has told MPs.

https://www.bbc.com/news/technology-64224950

It is full of buzzwords and statements which require validation and which go against current facts. There is enough evidence associated with FTX, crypto.com, Genesis, Zilliqa, Dogecoin, SpaceBIT, PayCoin, GetGems, Squid Game, Bogged Finance, Ekta, OneCoin, Ethereum’s DAO,

StableCoins are a particular use case with three varieties according to Wired. https://www.fastcompany.com/90751716/panics-and-death-spirals-a-history-of-failed-stablecoins

There are three main types of stablecoins: fiat-backed (in which the token maintains equal reserves of the currency it’s pegged to); crypto-backed (in which the token is collateralized by cryptocurrencies); and algorithmic (in which the token relies on algorithms to regulate supply and demand in order to peg its price to a dollar).

UST is a blend of crypto-backed and algorithmic (not all algorithmic stablecoins are backed by an asset). Historically, most of the stablecoins we’ve seen fail have been algorithmic.

StableCoin has a single point of failure

The attraction of Stablecoins lies in the apparent connection to a stable source of value. Fiat currency would be the obvious one but few are that obvious as we see from the Wired quote above.

However even a tie to currency is not stable of we cast our mind back to the 2008 banking crisis, and in particular Sept 15th, 2008, which this age old promise failed and “broke the buck”.

As documented by USA Today later:

In Washington, Treasury Secretary Henry Paulson didn’t wait around to debate the crisis. Worn down by the Lehman weekend and scared by the market’s reaction, he stepped in on Sept. 19, 2008 without congressional authorisation, and placed a federal guarantee on all U.S. money fund assets for the first time. It was the single most important decision of the financial crisis, made in the white-hot heat of a true panic. Money funds, blindsided by Lehman Bros, became stable.

Paulson moved on to the well-documented battles to prop up investment banks and begin the process of Wall Street reform. Effectively, the crisis ended that day. Few realized how scary it had become on Sep 18th, 2008.

The inter bank money market in those days was worth $3 trillion. Liquidity had vanished.

That is the underlying risk of StableCoin – no backup; without a back of the envelope, decision by Paulson the US dollar could have become another emerging market peso as would your savings.

Case in point – Crypto StableCoin

It is all too easy to write this off as hyperbole or exaggeration. But consider this: if your pay is denoted in StableCoin it just went to zero if that single point of failure failed.

We can see that with FTX, how all the regulatory rules and common business risk rules were broken. Amongst them:

• co-mingling of cash between corporate (FTX) and personal monies
• co -mingling of cash between companies
• unregulated entities creating a web of money movement which it will take years to analyse.
• dealing between unregulated entities who somehow convinced regulated entities to lend to them. Eyes were lit up with dollar signs on a casino machine.
• zero consideration of enterprise risk, bank process, separate of funds, and the most fundamental – no consideration of KYC/ AML. AML 101 says understand with whom you are dealing and understand the corporate structure. KYC/AML would have stopped SBF in his tracks.
  

Another take on StableCoins

Per CNBC https://www.cnbc.com/2023/01/13/a-stablecoin-collapse-could-spill-into-us-bond-market-academic.html

Eswar Prasad, an economics professor at Cornell University, warned that a run on stablecoins could spill into bond markets as issuers of these types of cryptocurrencies may have to sell U.S. Treasurys to honor redemptions.

Issuers of stablecoins tether, USD coin and Binance USD, claim they are backed by real-world assets, including billions of dollars’ worth of U.S. Treasurys.

Prasad said that if such a run were to occur when bond market sentiment was “very fragile as it is in the U.S. right now,” there could be a “multiplier effect,” thanks to large selling pressure on Treasurys.

In summary Prasad is saying even the “Stable Link” is not stable. We saw another example during the Pension liquidity crisis that is ongoing following the Truss budget. The instrument(s) which from the other side of the StableCoin link and providing stability could easily become non stable and result in a “break the buck” scenario.

”Stablecoins are designed to have a predictable value linked to traditional currencies or assets such as gold.”

This statement from the British government Treasury paper is a fiction, and frankly the authors should be disciplined and moved to a different desk. Nothing has a predictable value is time of crisis. That word “nothing” is chosen deliberately. I saw that in the 80’s and lived through it as a commercial lending banker.

Other considerations that no-one wants to acknowledge

Some of my thoughts on other areas of risk with Crypto. Each could have a solution but non exist today. In fact Stable is a feature designed to gloss over the risks by guaranteeing liquidity but as described, not so fast, to draw that conclusion.

• Blockchain is slow, computer intensive – why else would thy be built on the steppes of Khazikstan.
• it is not suitable for payments – can never produce the speed necessary without changing how BlockChain works.
• it is good for hiding identities (and crime)
• it promises transparency but it is the single most opaque aggregation of instruments I have ever seen. In fact Griffith makes this point more risky by stating “… said the UK rules could be broader, to include decentralised finance, and everyone would benefit from greater transparency.”

Relevance to Bankwatch

The only statement I like in this document is “A public consultation on the attributes of a digital pound would be launched in coming weeks, Mr Griffith told the Treasury Select Committee.”

That makes sense because we can’t have other jurisdictions getting into Crypto without at least understanding it.

(When that public consultation begins I offer my services at a 50% discount to what MckDelErnst will charge)