Stablecoin issuers risk disrupting funding markets, JPMorgan says

STABLECOIN issuers vying for assets in the short-term funding space risk disrupting the market after the US 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 at 5.3%.

“While prohibiting access to non-standard money-market funds makes sense from a financial stability perspective, it risks potentially disrupting the already-soft floor for money market rates that the Fed’s ON RRP currently provides,” strategists led by Teresa Ho wrote in a note to clients on Tuesday.

The RRP is a safe and attractive place for money-market funds, banks and other counterparties like government-sponsored enterprises to stash money overnight. It offers a steady known rate that’s linked to Fed policy benchmarks that is oftentimes higher than many other money-market alternatives like Treasury bills or market-based repo.

Until Treasury unleashed a deluge of bill supply beginning in June, counterparties parked more than $2 trillion at the Fed’s facility. Since then, usage has declined by roughly $723 billion as money-market funds shifted cash to higher-yielding T-bill and private repo markets. That shift slowed in the middle of July as other investors, enticed by the 5% yield on bills, piled into the very front end, crowding out the money funds.

So far this year, the total value of the crypto market has jumped around 30% to about $1.05 trillion, while the stablecoin sector has actually shrunk. It was down about 8% to around a two-year low of $127 billion in late July, according to researcher CCData. 

The combined reserve portfolios of the two largest stablecoins — Tether and USDC — was $114 billion as of June 2023, with over 60% in T-bills and 25% in repo. Even though they only represent 2% of the bill market, the strategists said additional growth in stablecoins could crowd out other buyers and intensify the supply-and-demand imbalance in the money-market space, leading to shortages in T-bills and repos, pushing rates even lower.

As the number of stablecoin issuers grows and enter short-term funding markets, there’s also an increasing exposure of the traditional financial system to turbulence in the crypto space.

For example, the collapse of TerraUSD in May 2022 underscored how quickly a run could occur in the short-term rates space. That’s because a swift and massive liquidation of other high quality liquid assets such as Treasury bills by one stablecoin issuer could impact the net asset value of other issuers and money-market funds holding T-bills, prompting even more liquidations.

“While it is a tail risk, the cryptocurrency market seems to be more prone to it,” Ho wrote. “Furthermore, any massive liquidation would likely be constrained by dealer balance sheets and their limited capacity to intermediate, which could also impact the NAV of other stablecoin issuers and other liquidity holders.” — Bloomberg News