- ABA warns stablecoins could stress Treasury markets.
- Coinbase urges modernizing market infrastructure, not banning stablecoins.
The American Bankers Association raises alarm over the expanding footprint of stablecoins, warning that their real-time redemption feature could destabilize US Treasury markets. In a thorough analysis, the banking trade group cautioned that stablecoins redeemable around the clock may not align with the Treasury market’s next-day settlement structure in volatile market situations.
The banking lobby’s comment fuels an already heated debate in Washington over the prospects for stablecoins and how to fully integrate them into the American economy, side-by-side with traditional finance.
ABA Flags Potential Liquidity Risks in Stablecoins
According to the ABA, there are loopholes in the mainstream view that when payment stablecoins are “backed one-to-one with safe, liquid assets,” users are able to redeem their assets even in turbulent market conditions.
“The general presumption is that short-term Treasurys are highly liquid even during times of stress. Our analysis indicates that this is a highly questionable presumption, especially when there is massive selling pressure, and might not be based on any robust study of secondary market liquidity of T-bills,” said the ABA.
Due to the very widespread holding of US treasuries, regulators have expressed worry over the ability of the treasury market to remain resilient during stress. The Federal Reserve Board signaled that the liquidity in the Treasury market has been relatively low, while highlighting recent bouts of instability like the September 2019 repo strain and the March 2020 “dash for cash.”
Banks and investors usually borrow and lend money via the “repo” market using safe assets like Treasury bonds. However, in September 2019, there was suddenly not enough cash in the normally very liquid market. Interests spiked unexpectedly, and the Fed had to intervene with emergency loans to maintain the system’s operation.
Similarly, in March 2020, after COVID 19 hit, there was a dash-for-cash, where investors wanted cash urgently to balance out losses and withdrawals. This rush exposed the Treasury market and certain money market funds to intense pressure.
Although Treasuries and government-backed funds held up as a safe place to park money, the ABA still warns that “the liquidity risks inherent to payment stablecoins could potentially amplify risks during episodes like those witnessed in the dash for cash in March 2020.”
In essence, the group dissuades policymakers and market participants from positioning payment stablecoins as similar in operation to fiat currency or other cash equivalent instruments like money market funds.
Infrastructure, Not Stablecoins, Is the Real Issue
Faryar Shirzad, Coinbase Chief Policy Advisor, noted that the ABA’s objection “is not to stablecoin rewards”, but to the GENIUS Act. He pointed out that the group “inadvertently” justified “why Treasury markets should be tokenized—not why stablecoins should be banned.”
He emphasized that the 2019 repo and 2020 dash-for-cash crises weren’t caused by stablecoins, but by “structural failures in legacy plumbing.” A viable precaution, according to Shirzad, should not be to “ban new rails,” but to upgrade underlying infrastructure (Treasuries and market rails), which may involve tokenization of these instruments.
