In a Short-Term Market Research Note, J.P. Morgan’s Teresa Ho and her colleagues write that although total stablecoin issuance is down from $180 billion in May 2022 to $120 billion in September 2023, financial stability risks remain:
The growth in reserve-backed stablecoin issuers, without access to [Fed Reverse Repo Facility – RRP] or central bank reserves, could increase the sensitivity between stablecoins and the traditional financial system. The collapse of TerraUSD in May 2022 highlighted just how quickly a run can occur, in an asset class that trades 24/7. A swift and massive liquidation of other HQLA such as T-bills by one stablecoin issuer could significantly impact the NAV of other stablecoin issuers and MMFs holding T-bills, prompting more liquidations.
Tether said in May 2023 that it was emphasizing the repo market in its reserve investment strategy:
Tether closed the first quarter 2023 with $81.8B in consolidated total assets. The majority of its reserves are invested in US Treasury Bills. It has also been working to take steps to reduce its reliance on pure bank deposits as a source of liquidity and instead leverage the Repo market as an additional measure to ensure higher standards of protection for its users by maintaining the required liquidity.
Also in May 2023, Circle turned towards repo and away from US Treasuries. As Coinbase reported:
The Circle Reserve Fund, managed by global investment management giant BlackRock, added $8.7 billion in overnight repurchase (repo) agreements to the portfolio as of May 16, according to the fund’s website. The so-called tri-party repo agreements involve banking giants such as BNP Paribas, Goldman Sachs, Barclays and Royal Bank of Canada.
While not a dire concern for today, market participants should be aware of the linkage between stablecoins and repo market stability. A sharp run on the stablecoin market could result in quick cash withdrawals from US Treasury repo particularly.