The reserves that coin operators hold to at least partially back their currency
can affect short-term markets, particularly as they increase in scale. Tether,
for example, held 49% of its reserves in certificates of deposit and CP as of
end-June 2021. Meanwhile, Diem, a global stablecoin backed by Facebook, but not
yet released, has previously proposed to hold at least 80% of its reserves in
short-term high-quality government securities and the remaining 20% in cash,
with overnight sweeps into daily liquid government money market funds (MMF).
The rapid growth in stablecoins means these securities holdings are already
relatively large; although Tether's annualised market value growth slowed to
45% in 2Q21, it has risen by 230% since the start of 2021 to 15 October to
reach USD68.6 billion.
Current growth rates and reserve allocations suggest that stablecoins could
become a significant investor group in the US CP market. For example, in a
hypothetical scenario where stablecoin market value continues to grow at near
current rates, and reserve holding allocations remain stable, their CP holdings
could exceed those of money market funds within two or three years.
The launch of the Diem US-dollar stablecoin could further spur the sector's
market value growth. We believe it will not directly affect the CP market due
to the government-securities focus of Diem's declared reserve allocation plan,
but alternative allocation strategies remain possible and, depending on its
scale, the operator may become an important participant in other short-term
Stablecoins could be disruptive for
CP markets; for example, owing to run risks. Stablecoin-related turbulence
could both affect the CP market itself and transmit shocks to other market
participants. Risks could be aggravated if the infrastructure and partners used
by stablecoin operators to engage with traditional markets lack a record in the
smooth handling of transactions during periods of market stress or volatility.
Growth in stablecoins' market value has been volatile and their reserve asset
allocations may change, making forecasts challenging; for example, the latest
attestation from USD Coin (USDC) indicates that its CP holdings with maturities
of 91 days to 13 months plunged to 2% of reserve assets in August, from 10% in
June. Actual holdings remain opaque, even in the most transparent cases, and
granular asset breakdowns are not readily available.
The regulatory approach towards stablecoins will affect how the sector
develops, although the timeline and details of regulation in key markets - most
notably the US and EU - remain unclear. The EU, for example, is negotiating new
regulations on crypto assets that would require stablecoins that are intended
to be used as a means of payment to invest their reserves in cash and very
low-risk predominantly government securities.
A requirement for stablecoin operators to hold more reserves in safe and highly
liquid assets could reduce allocations to CP, but raise the influence of
stablecoins on the short-dated government market. Other initiatives, including
the potential launch of central-bank digital currencies, could also
significantly affect demand for stablecoins.