Stablecoin Reserves and Volatility Bear Watching

It’s a safe bet that stablecoins will become more mainstream within everyday commerce and in commercial settings.

Legislation is moving through Congress that would establish frameworks for issuers, and banks are exploring a consortium approach to create an interoperable stablecoin.

The market cap of these coins now tops $249 billion, according to CoinMarketCap.com. Tether is the largest of the tokens, with a market cap of $152 billion and a daily trading volume of about $117 million.

Growth and Risk

As the stablecoin market grows, it’s important to know the risks that are inherent in the construct of the coins themselves. The reserves that back stablecoins often are a mix of assets that can be exposed to market shocks, especially in Treasurys and commercial paper. Regulation of these reserves is on the horizon, but financial instruments fluctuate.

Generally, the reserves help maintain the peg of the coin, in a bid, for example, to maintain parity with the U.S. dollar. However, if there are fluctuations, stablecoin issuers must sell or rebalance those holdings to keep the peg or meet redemptions if and when they are demanded by holders. In the case of a swell in redemptions, should an issuer have to sell assets to meet those calls, a vicious cycle of losses may ensue. That’s especially true if issuers hold cryptocurrencies such as bitcoin in their reserves.

In the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, there are provisions for reserve reporting and for the makeup of those reserves, which would include 100% reserve backing with U.S. dollars and short-term Treasurys, “or similarly liquid assets as determined by primary regulator,” according to the Senate banking committee. As it stands now, issuers are not regulated as other financial players like banks are.

The focus on volatility is especially timely, as Treasuries, which are essentially the world’s reserve asset, have been fluctuating on shifts in fiscal policy and tariff uncertainty. The rule of thumb is that higher government borrowing, in the face of reduced tax revenue, will raise borrowing costs. The loss of the highest credit ratings for the U.S. also hikes borrowing costs, which in turn leads to a selloff in Treasuries. Corporate debt also becomes more expensive. Although short-dated Treasuries are generally less volatile than their longer-dated brethren, they still can be subject to yield and price gyrations.

For example, the one-year Treasury yield around the time of the April tariff announcements was below 4%. Recently, it crossed the 4.13% mark, which means the price has fallen. One-month Treasuries have been hovering at about 4.37%, although above the long-term average of 1.6%. Commercial paper yields have fluctuated as well, according to the Federal Reserve.

In years past, there have been instances of stablecoins breaking their pegs. In 2022, for example, Tether lost its peg amid a wider spread flurry of selling and over regulators’ concerns that stablecoins’ backing was not in fact “credit risk-free.”

Several stablecoin issuers publish their reserves. In the latest report by Tether, for example, within its cash and equivalents, which make up 81.5% of the $149.3 billion in reserves, 81% of that segment is in U.S. Treasury bills, and 5% are in bitcoin. Elsewhere, Paxos reported that the Pax Dollar coin’s $79 million in reserves is tied to $67 million in cash held at banks; the remainder is held in repurchase agreements that use Treasuries as collateral.

As stablecoins continue to gain ground as a unit of commerce, and as corporate executives use them as part of their own treasury and cash flow management operations, there’s an old investment maxim worth following: Know what you own. By extension, one might add: It’s critical to know what’s owned by what you own.