Stablecoins pose less risk than bank deposits, says former Fed policy analyst

Stablecoins cannot be compared to bank deposits in terms of risk, nor to money market funds, claims a new policy document published by Paradigm.

Stablecoins cannot be compared to bank deposits in terms of risk, argues a new policy paper written by former Federal Reserve analyst Brendan Malone on behalf of technology investment firm Paradigm.

The paper explores the risks that stablecoins pose to the financial system, noting that current legislative proposals in the United States could integrate crypto payment instruments into existing banking and securities frameworks. Malone asserts that the risks posed by stablecoins are lower than bank deposits and different from money market funds.

Stablecoins are cryptocurrencies programmed to have a stable value against a specific asset, usually a fiat currency like the US dollar. A money market fund is a type of mutual fund that invests in short-term assets, cash and cash equivalents with a lower level of risk than other mutual funds.

According to Malone, banks are exposed to what is known as maturity transformation when they accept short-term deposits and use those funds to offer long-term loans that have not been repaid for years. Maturity transformation creates ongoing risk for banks and requires ongoing risk management.

A recent example of the risks associated with maturity transformation is the collapse of Silicon Valley Bank in March. The US bank is said to have customer deposits earmarked for long-term assets and had to be shut down by regulators following a bank run.

In Malone's view, stablecoins pegged to fiat currency do not inherently pose similar risks, as their reserve assets are typically backed by short-term treasury bills and segregated from the issuer's assets. . “Federal regulations implemented under new legislation may require specific safeguards. If so, unlike bank deposits, there would be no duration gap between short-term liabilities (a stablecoin holder can...