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Stablecoins Survived ‘Crypto Winter,’ But That Doesn’t Make Them Safe

Yale Insights – Cryptocurrencies such as Tether, which is pegged to the dollar, have held on as others crashed. “But according to new research by Yale SOM’s Gary Gorton, these “stablecoins” still pose major risks to the global financial system:  “Amid the harsh conditions of this year’s “crypto winter,” one category of blockchain currency has fared better than others: stablecoins, which are pegged to an existing currency such as the U.S. dollar or the Euro. As its counterparts stumbled, the largest stablecoin, Tether, briefly became unshackled from the dollar but managed to hang on. “They weathered the storm,” says Gary Gorton of Yale SOM. But that doesn’t mean the coast is clear. In several recent publications, Gorton highlights the systemic risks stablecoins pose by comparing them to the private currencies of the past. Those historical analogues ultimately created more problems than they solved and failed to improve on money issued by governments. The very same problems, Gorton argues, are true of stablecoins today. In a paper co-authored with Sharon Y. Ross of the US Treasury and Chase B. Ross of the Federal Reserve Board of Governors (both Yale SOM alumni), Gorton shows that stablecoins are following patterns similar to the privately issued banknotes of the “free banking” era in American history. During this period, from 1837 to 1863, banks could issue their own money, ostensibly backed by state bonds. The challenge was that merchants in one region were understandably wary of banknotes from another—resulting in a complex system where currency grew less valuable as the distance from its issuer increased. Lax regulation also made these private notes vulnerable to bank runs. Eventually, to control the chaos, the federal government stepped in and became the exclusive issuer of a uniform national currency…”

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