In Cointelegraph's latest video report, we discussed the systemic risks posed by stablecoins to the stability of both crypto and traditional markets.
Stablecoins have become the backbone of the crypto ecosystem, as they play a crucial role in the functioning of crypto trading and decentralized finance. Their market capitalization has grown fourfold since the start of 2021.
But the lack of transparency around the reserves backing stablecoins have left many wondering whether their growth is actually sustainable. Major stablecoins' recent disclosures showed that only a portion of their reserves is made up of cash, while a significant amount is kept in the form of riskier assets such as commercial papers.
Some analysts are worried that, in the event of a market downturn, stablecoin issuers might struggle to meet their clients’ redemption requests. That could potentially trigger a collapse in investors’ trust in those stablecoins, with serious consequences for the overall crypto market.
“The whole thing holds up as long as everybody believes it's fine and they're all using it for their own trading and nobody's ever trying to cash out”, said Frances Coppola, financial commentator and vocal stablecoin critic.
Governments around the globe are also concerned that a stablecoin meltdown could spill over into the traditional financial markets and they are calling for stricter regulation.
How serious is the risk posed by stablecoins? What are the possible scenarios following a major stablecoin collapse? And what could be done to mitigate the risk?