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A Run on Stablecoin Banks May Present “Systemic Risk” to the Financial System, According to EU Regulator
The European Systemic Risk Board (ESRB) released a report on Thursday detailing the top three alarming scenarios in which a crisis within the crypto sector could spill over and create “systemic risk” for the wider financial system.
The primary risk identified is a potential run on a “large reserve-backed stablecoin,” such as Tether (USDT) or USD Coin (USDC).
Crypto’s Link to Traditional Finance
In its 77-page document, the ESRB contended that as the unpredictable crypto sector expands, its ties to the conventional financial landscape also increase.
The board does not perceive this interconnectedness as posing any immediate “systemic risk” to “fundamental services,” observing “only sporadic correlation between the fluctuations of crypto-assets and traditional finance.”
However, there are several ways this risk could materialize in the future. These include an inability to recognize how forms of interconnectedness evolve, along with the further integration of crypto technologies within traditional finance itself.
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Currently, one of the primary links between crypto and traditional finance is reserve-backed stablecoins. These are crypto-assets that maintain a price peg to a relatively stable, non-crypto asset such as fiat currency or gold, and are supported by reserves containing those assets.
“A run on a reserve-backed stablecoin would lead to forced selling of marketable debt and withdrawals from banks,” stated the ESRB. “There is always the possibility that this could escalate into a wider panic.”
Stablecoin Crisis
Stablecoin crises are not unfamiliar to the crypto sector. In May 2022, Tether experienced withdrawal pressures amounting to billions of dollars but still managed to maintain its dollar peg. USDC lost its peg for several days in March 2023 following the collapse of Silicon Valley Bank, which held a significant portion of the reserves backing the coin, leading many holders to seek refuge in USDT.
Crypto is also linked to traditional finance through banks and other entities that enable conversions between crypto assets and fiat currency. The board pointed out that these institutions can also experience runs and failures—similar to Silicon Valley Bank, Silvergate Bank, and Signature Bank in March.
“Overall, at this stage, this report concludes that the connections between the crypto-asset and traditional financial worlds remain extremely modest.”
In addition to a stablecoin run, the board asserted that an increase in the prominence of crypto assets within the payment system could pose risks that transmit into the traditional finance sector. The International Monetary Fund (IMF) has cautioned about similar risks concerning El Salvador, recommending the abandonment of Bitcoin as legal tender.
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