Stablecoin issuers, like the banks they aspire to disrupt, have about 70-90% of client deposits invested in a portfolio of fixed income instruments

Stable coins issuers, like the banks they aspire to disrupt, have about 70-90% of client deposits invested in a portfolio of fixed income instruments

The article discusses the risks associated with stable coins and how they are not immune to the same issues that can affect traditional banks, despite operating in a different environment.

It highlights several key points:

* Stable coin issuers, similar to banks, invest a large portion of client deposits in a portfolio of fixed-income instruments. This makes their earnings sensitive to changes in interest rates, inflation, foreign investors' sentiment, and AUM.

* These sensitivities in the past led to the 1933 banking crisis, necessitating deposit insurance and the separation of deposit-taking and investment activities, as stipulated by the Glass–Steagall Banking Act of 1933.

* However, stable coin issuers, operating more like broker/dealers in the fintech space, are not subject to these regulations and therefore also not candidates for any deposit insurance.

* The article further mentions that while often considered safe havens, bonds are also affected by factors like default risk and changes in issuer credit rating, as seen with Fitch's downgrade of the U.S.

* It also notes instances of a 10-Year Treasury bond yield spike and the Global Bond Massacre of 1994 due to unexpected interest rate increases by the central bank to combat inflation.

* Additionally, the recent placement of tariffs by President Trump could decrease demand for Treasuries and ultimately increase volatility in the bond market, impacting the stable coin issuers.

* In essence, default risk, economic policies, and investor sentiment drive the bond market and its volatility, which could negate the safe haven status of these instruments.

* Bank runs can easily occur if new deposits fail to outstrip withdrawals, necessitating short-notice bond sales on secondary markets to crystallize losses.

* If these sell-offs drive down AUM below the minimum required for the company to remain viable, the company will become bankrupt.

* The FDIC has successfully managed to fully reimburse depositors, even those with balances above the $250,000 limit, in the recent failures of five banks with a total of $548 billion in assets.

* However, on the other side, about $85 million of client deposits are yet to be accounted for by Synapse's Trustee, and the Terra/Luna crash saw the UST stable coin de-peg from the dollar, evaporating nearly $40 billion in value.

In essence, stable coins, like the weakest bonds in their portfolio and their AUM, are fragile. Being deployed in a public blockchain does not grant them immunity to the same risks faced by conventional banks, as they follow a similar investment playbook.

The article concludes by mentioning that while some of the larger stable coin issuers are reporting record revenue numbers due to the current high-interest rate environment and high demand from investors for treasuries, this could change. If interest rates rise too quickly, governments might default and the bond markets could collapse, dragging stable coin issuers down with them. Conversely, if interest rates are decreased, stable coin issuers might face an unsustainable lower return on their investments or be forced to change their investment strategies to riskier longer-term T-bonds, a move that ultimately led to Silicon Valley Bank's downfall. Whichever way it goes, the reader is advised to beware.