Barclays Analyst Wary Outflows May Put Stablecoins on Shaky Ground

Barclays analyst Joe Abate says fully collateralized stablecoins might not be any different from algorithmic ones like the collapsed Terra UST coin in terms of risks, Bloomberg reported Thursday (May 19).

He said there have been questions over the assets backing the Tether stablecoin, but the token might still crash even if it is collateralized.

The risk comes in part from “sudden outflows,” with the report saying the coin is supposed to hold financial assets like cash reserves and bonds to back up the one-to-one peg with the U.S. dollar. But it also controls redemptions of crypto with fees and minimum size requirements for direct redemptions into fiat. Crypto will sell faster in the secondary market, though the price won’t be as good.

The report says nerves have been on fire over stablecoins’ safety since the UST crash earlier in May, which saw mass displacements of the value of numerous cryptocurrencies and related businesses’ stocks.

The coin was trading at 95 cents on May 12. But some investors have apparently been willing to lose 5% on that in exchange for getting out early.

Abate wrote that investors in Tether could “either redeem their holdings directly from Tether like a money fund redemption — assuming they meet the minimum redemption size — or they can sell them in the secondary market.”

“We think that willingness to absorb losses, even though USDT is fully collateralized and has an overnight liquidity buffer that exceeds most prime funds, suggests the token might be prone preemptive runs,” he wrote, per the report.

See also: Crypto Exchanges May Be Required to Keep Client Funds Separate, Report Says

PYMNTS wrote recently that the Biden administration is asking Congress to make crypto exchanges keep customers’ money separate from their own corporate funds.

The report said that could limit the way the industry conducts business. The move followed an announcement by Coinbase that said customers’ money might be tied up if Coinbase declared bankruptcy.

Officials have implored lawmakers to fix the issues by making a future legal framework forcing crypto firms to keep customer assets separate, which is already a rule for financial firms.