The European Systemic Danger Board (ESRB) wasย releasedย a report on Thursday outlining the top 3 nightmare scenarios in which a cryptocurrency industry crisis could bleed in and pose โsystemic riskโ to the broader financial system.ย
The top danger listed is a potential run on a โlarge reserve-backed stablecoin,โ such as Tetherย (USDT) (USDT) or USD Coin (USDC).ย
Cryptocurrenciesย Connection to TradFi
In its 77-page report, the ESRB claimedย that as the volatile cryptocurrency industry grows, so asย well does its connection to the mainstream financial world.ย
The board doesnโt believe this interconnectedness poses any sort of โsystemic riskโ to โfundamental servicesโ in the immediate future, noting โonly sporadic correlation betwixt the booms and busts of crypto-assets and traditional finance.โ
That stated, there are a variety of ways that this danger can manifest down the line. These include a failure to identify how forms of interconnectedness develop, and further adoption of cryptocurrency technologies within traditional finance itself.
Atย thisย time, one of the main connections betwixt cryptocurrency and TradFi are reserve backed cryptoย stablecoins. These are crypto-assets that remain price pegged to a relatively price-stable, non- cryptocurrency investment like fiat currency or gold, and are backed by reserves containing those assets.ย
โA run on a reserve-backed cryptoย stablecoin would generate forced selling of marketable debt and withdrawals from banks,โ wrote the ESRB. โ Thereย is always the possibility that this could Becomesย a broader panic.โ
Cryptoย Stablecoin Panic
Cryptoย Stablecoin panic is nothing new to the cryptocurrency industry. In May 2022, Tetherย (USDT) suffered withdrawal pressure within the billions of dollars in May 2022, but still managed to keep its peg to the dollar. USDC depegged for numerous days in March 2023 after the collapse of Silicon Valley Bank, which held much of the reserves backing the coin, prompting numerous holders to flee into USDT.ย
Cryptocurrency is likewise connected to TradFi through banks and other institutions that facilitate conversions betwixt cryptocurrency assets and fiat currency. The board pointedย outย that these institutions can likewise face runs and fail โ much like Silicon Valley Bank, Silvergate bank, and Signature Bank in March.ย
โ Inย general, atย thisย point, this report concludes that the connections betwixt the crypto- investment and traditional financial worlds remain incredibly modest.โ
Aside from a cryptoย stablecoin run, the board arguedย that a boost of prominence in cryptocurrency assets within the payment system could cause danger to transmit into the TradFi world. The International Monetary Fund (IMF) has warned of similar dangers surrounding El Salvador, to which it recommends abandoning Bitcoinย (BTC) as legal tender.ย
