USDC's Depeg Laid Bare the Risks Traditional Finance Poses to Stablecoins

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'In Moody’s view, the risks...depeggings highlighted is that stablecoin issuers’ reliance on a relatively small set of off-chain financial institutions limits their stability,' MoodysInvSvc's Cristiano Ventricelli writes. Opinion.

Regulators have expressed concern in recent years that decentralized finance could pose risks to the traditional financial services sector. Those worries were magnified by events such as algorithmic stablecoin terraUST’s collapse and the failure of the FTX crypto exchange in 2022, which had relatively limited spillover effects on established financial institutions.

But a new realization has emerged following the recent failures of Silicon Valley Bank and Signature Bank: distress from established financial institutions can spread to the DeFi sector, too. But, in Moody’s view, the risks have now been laid bare. What the depeggings highlighted is that stablecoin issuers’ reliance on a relatively small set of off-chain financial institutions limits their stability. And broader awareness of these risks could actually make the situation worse for stablecoin issuers.

In light of these recent events, regulators could increase their scrutiny of stablecoins. Last year, the Terra/LUNA collapse raised concerns about stablecoins' reserves, leading regulators to recommend additional liquidity and. Now, the depeg of USDC and other stablecoins is highlighting a different set of governance risks related to the custody of reserve assets.

 

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MoodysInvSvc Interesting point of view! It appears that the stability of stablecoins is dependent on a small group of institutions, which could be an issue in the long run.

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