BlackRock’s Bitcoin ETF Filing Revealed Stablecoin Concerns

BlackRock, the financial behemoth, has issues with stablecoins as an asset class.

According to its iShares Bitcoin spot exchange-traded fund (ETF) filing, BlackRock identifies stablecoins as risk factors. The price fluctuations are the main issue.

Stablecoins usually have a one-to-one peg with their underlying fiat currency, giving them numerous advantages over other tokens whose movements are affected by volatility. BlackRock indicated that the price movements that affect their fiat peg and status impact Bitcoin prices.

Previous Events Highlight Stablecoin Concerns

Stablecoins, as an asset class, have faced situations that pushed the cryptocurrency markets in different directions.

For example, iFinex, Inc., the USDT operator, faced legal actions over its 1:1 dollar claims to the greenback on February 17, 2021, and October 15, 2021. Tether faced penalties and restrictions, including a $61 million fine.

Early this year, on March 10, 2023, Circle, the USDC stablecoin issuer, lost its peg following revelations of its exposure at Silicon Valley Bank worth $3.3 billion.

These concerns border mainly on the digital nature of stablecoins.

The disclosure indicates the complex nature of the cryptocurrency markets and how stablecoins could affect participants indirectly.

Operationally, stablecoins are a form of liquidity. The near-instant nature of the exchange of tokens has provided an added layer of ease of use and speed. It has also made them become a hidden force that unwittingly affects cryptocurrency prices.

The Federal Reserve also iterated this position. The central bank identified similar risks with dollar-pegged stablecoins and the danger they pose to the American financial system.

A staff report published by the Federal Reserve Banks of Boston and New York on September 26, 2023, noted the similarities of stablecoin price movements with those of money market funds during runs.

The report indicated that the instability during such events could flow into the broader financial system, posing critical risks.

The report noted, “Our findings show that stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events. Should stablecoins continue to grow and become more interconnected with key financial markets, such as short-term funding markets, they could become a source of financial instability for the broader financial system.”

Price pegs below $0.99 for dollar-linked tokens could also trigger and speed up redemptions.

Stablecoin Runs and Liquidity are Mutually Exclusive

Correlations between price movements and cryptocurrency prices have significantly changed since the introduction of stablecoins.

From the first minting of USDT token prices in 2014, Bitcoin’s volatility increased with highs swinging between $850 in 2015, $963.74 in 2016, and the 2017 massive bull run.

The rapid increases and subsequent surges could not have been possible without Tether’s market capitalization, currently around $87.3 billion, and the USD Coin (USDC), which is around $23.8 billion.
It’s also important to remember that BlackRock is a member of the group of financial institutions in charge of Circle’s USDC reserves.
A factor that comes into play in the ongoing discussion.

 





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