J.P. Morgan published a new "Stablecoin market update," which explains, "It has been a year of turmoil in the crypto industry, marked by the collapses of several entities including FTX, Three Arrows Capital, BlockFi, Celsium, Genesis, and others. Even before then, confidence in cryptocurrency, including stablecoins, was weakening given the run on TerraUSD in early 2022. It's no surprise, then, that the stablecoin market has shrunk, along with the broader cryptocurrency market. According to CoinGecko, the size of the stablecoin market has fallen from a peak of ~$180bn in May 2022 to ~$120bn today."
It continues, "Interestingly, a look at the composition of the stablecoin market shows Tether meaningfully gained market share over the past year, increasing from a low of 46% last summer to 70%, while USDC's market share has fallen to 22% from a high of ~40% last summer. Notably, despite a shrinking market, PayPal, in partnership with Paxos Trust, recently announced that it will issue a new stablecoin, PayPal USD (PYUSD). PayPal's foray into the stablecoin market will mark the first stablecoin with an already-established presence in the consumer payments market."
JPM says, "PayPal's decision to launch a stablecoin speaks to its positive view on stablecoin regulations, in our opinion. To that end, in July, the U.S. House Financial Services Committee passed a bill to establish a federal regulatory framework for payment stablecoins, called the 'Clarity for Payment Stablecoins Act of 2023,' one of the first pieces of legislation we have seen that focuses specifically on payment stablecoins. At present, there are two other bills that have been introduced that look to establish a comprehensive and unified regulatory scheme for digital assets and their derivatives ..., both of which have received bipartisan support."
They write, "Though far from final, the proposed legislation would generally require stablecoin issuers to maintain reserves backing the issuer's outstanding payment stablecoins on an at least one-to-one basis and subject issuers to additional regulatory requirements. Reserves would comprise of HQLA, ranging from insured deposits, T-bills (with a maturity <90 days), repos (with a maturity of <7 days and backed by Treasury bills with a maturity of <90 days), central bank reserves, and other assets deemed appropriate."
J.P. Morgan also writes, "In the meantime, stablecoin issuers continue to actively manage their reserves as they see fit. Based on Circle's disclosures, the majority of USDC's reserve assets are in an SEC 2a-7 registered government MMF of which Circle is the sole shareholder (aptly named Circle Reserve Fund). Meanwhile, Tether's reserve portfolio has turned significantly more conservative since we started looking two years ago. Figure 2 and Figure 3 show allocation breakdowns of the respective coins' reserve portfolios."
Finally, they add, "Relatedly, earlier this year, the Fed announced a change to the terms of the Fed ON RRP facility, noting, 'SEC registered 2a-7 funds that, in the sole judgment of the New York Fed, are organized for a single beneficial owner, or exhibit sufficient similarities to a fund so organized, generally will be deemed ineligible to access reverse repo operations.' The revision also clarifies that financial stability and ensuring bank safety and soundness are factors considered when evaluating ON RRP counterparties. We suspect this announcement was in response to the application filed by Circle Reserve Fund to get access to the Fed's ON RRP facility. The Fed's change to the terms of its ON RRP facility would effectively close the back door for a non-standard MMF counterparty to get access to the Fed's balance sheet."
Bloomberg wrote about the JPM piece in its update, "Stablecoin Issuers Risk Disrupting Funding Markets, JPMorgan Says." They comment, "Stablecoin issuers vying for assets in the short-term funding space risk disrupting the market after the Federal Reserve limited access to a key facility, according to JPMorgan Chase & Co. The central bank decided in April that money funds created for the sole purpose of accessing its overnight reverse repo facility, or ON RRP, were deemed ineligible as a counterparty. That means stablecoins, seeking to park cash in liquid assets and unable to access the Fed facility, will likely have to compete with the $5.64 trillion money-market fund industry for assets like Treasury bills, potentially pushing those rates below the offering level on the RRP -- currently 5.3%."
Last week, The Wall Street Journal published "Tether Is Lending Its Stablecoins Again," which tells us, "Tether Holdings resumed lending out its own stablecoins to customers, less than a year after it said it would wind down the practice. The cryptocurrency issuer in its latest quarterly financial update said its assets included $5.5 billion of loans as of June 30, up from $5.3 billion a quarter earlier. A company spokeswoman confirmed that Tether made new loans. The company, which is incorporated in the British Virgin Islands, calls them secured loans and discloses little about the borrowers or the collateral accepted. The loans are issued and denominated in the company's tether tokens. Stablecoins such as tether are anchors in the crypto market. The premise of digital assets such as tether -- and other stablecoins -- is that the issuer always will redeem one coin for $1. Issuers take pains to demonstrate they have ample funds available to do so."
The Journal also writes, "The World's Biggest Crypto Firm Is Melting Down." This piece says, "After FTX crashed, the world of crypto seemed to belong to the largest exchange, Binance. Less than a year later, Binance is the one in distress. Under threat of enforcement actions by U.S. agencies, Binance's empire is quaking. Over the past three months, more than a dozen senior executives have left, and the exchange has laid off at least 1,500 employees this year to cut costs and prepare for a decline in business. And while Binance still looms large in crypto, its dominance is dwindling. Binance now handles about half of all trades where cryptocurrencies are directly bought and sold, down from about 70% at the start of the year, according to data provider Kaiko."
Finally, staff from the Federal Reserve Bank of New York and Federal Reserve Bank of Boston re-posted their paper, "Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?" The Abstract expains, "Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. We also show that, similarly to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, for stablecoins, we estimate a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate."
