Stable coins issuers, like the banks they aspire to disrupt, have about 70-90% of client deposits invested in a portfolio of fixed income instruments such as government treasuries, repurchase agreements, highest quality bonds and money market funds.
Therefore, similar to banks such the failed Silicon Valley Bank (2023), their portfolios are also sensitive to changes in interest rates/inflation, foreign investors sentiment and reduction in assets-under-management (AUM) due to withdrawals far exceeding new deposits.
These sensitivities caused the 1933 banking crisis that saw the need to insure deposits against bank failures to restore trust in the banking system, through the creation of the Federal Deposit Insurance Corporation (FDIC). However, for the initiative to be sustainable, banks had to de-risk significantly by segregating deposit taking operations that prioritize client interests over investment management that prioritizes returns. This was the purpose of the Glass–Steagall Banking Act of 1933.
However, stable coin issuers like broker/dealer fintechs are not subject to these regulations and thus also not viable for any deposit insurance. Stable coin issuers are at the full mercy of their AUMs and bond markets with no safety nets. The latter is currently in turmoil as the 10-Year Treasury bonds saw the largest single week spike in yields from 3.99% to 4.5% for week ending 11th April 2025 since Covid
Bonds are not always safe havens.
The most common misconception is that buying highest grade bonds at issuance and holding them to maturity will always result in a …Full story available on Benzinga.com
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