Stablecoins problematic for Bitcoin, according to BlackRock

Yesterday, it was revealed that stablecoins are a risk factor for Bitcoin, according to BlackRock. 

The news went around the world within minutes, but then it turned out to be just business as usual, meaning nothing particularly curious or important. 

BlackRock: the fake news about stablecoins on Bitcoin

Indeed, to be fair, it was initially spread as genuine fake news, although it had some basis in truth. 

In fact, some sources erroneously reported that BlackRock had officially stated that it feared USDT and USDC could do damage to Bitcoin. 

In reality, however, it does not appear at all that BlackRock had lashed out at Tether and Circle, i.e., the issuers of USDT and USDC, and going to verify the primary source of the information revealed that things were slightly but significantly different. 

The primary source

The primary source is an official document submitted by BlackRock’s iShares Bitcoin Trust to the SEC. 

The iShares Bitcoin Trust is the fund that will issue shares of BlackRock’s spot Bitcoin ETF to the market once it is approved by the SEC. iShares in turn is a company that is a full-fledged part of the BlackRock Group. 

The official document is the one that describes to the agency the features and details of the fund, contextualizing them within the financial markets. 

Just in the part where the project is contextualized within the current situation in the financial markets there is a small chapter devoted specifically to stablecoins. 

This chapter states, in a general way: 

“Prices of Bitcoin may be affected due to stablecoins (including Tether and US Dollar Coin (“USDC”)), the activities of stablecoin issuers and their regulatory treatment.”

USDT and USDC

So in fact, BlackRock did not take a position, but merely highlighted the generic risks associated with stablecoins in crypto markets by mentioning the two main stablecoins. 

The discussion in the chapter on stablecoins actually covers all stablecoins, although it specifically mentions the top two because they alone are worth almost 90 percent of the entire market capitalization of all stablecoins pegged to fiat currencies. 

This is by no means a stance against USDT and USDC, nor is it a stance against stablecoins. 

The risks of stablecoins on Bitcoin

The paper points out that the Trust will not invest in stablecoins, although this was implied since it will obviously only invest in BTC. 

But it points out how, despite this, it could still be exposed to risks posed by stablecoins vis-à-vis the Bitcoin market and other digital assets. 

The problem highlighted by BlackRock, and already widely known to all for quite some time (since the implosion of UST), is that in theory the value of stablecoins should be stable and anchored to that of fiat currencies, but in reality it can fluctuate. 

The Trust writes: 

“This volatility has in the past apparently impacted the price of Bitcoin.”

It also points out that stablecoins are a relatively new phenomenon, thus deeming it impossible to know all the risks they could pose to Bitcoin market participants. 

The paper also mentions certain never-confirmed but still circulating hypotheses that the issuance of stablecoins themselves may generate artificial demand for Bitcoin, thus artificially inflating its price. They also mention other hypotheses related to the use of stablecoins for money laundering. 

The main risk, however, is related to depeg, that is, the loss of the market value anchor of stablecoins relative to the fiat currencies to which certain stablecoins are pegged, not least because in this case these are not at all unconfirmed hypotheses but real cases that have already happened extensively in the past. 

The consequences

BlackRock writes that stablecoins play a key role in crypto markets, so much so that changes in their liquidity can also have dramatic impacts there, and in particular on the price of Bitcoin. 

Then again, in a paper of this kind, it is not at all convenient to hide obvious and obvious risks from a public agency that not only knows them very well, but also considers them definitely important in this context. Moreover, these are things that have already been widely known for some time, so BlackRock has revealed absolutely nothing new. It has merely made it clear to the SEC that it is aware of the existence of these risks. 

They highlight that since the crypto market is still dependent on stablecoins such as USDT and USDC, there is a risk that any disorderly de-annexation, or a rush to withdrawals of USDT or USDC, could lead to dramatic volatility in the digital asset market in general. 

Specifically, they warn that problems related to the two major stablecoins could affect the willingness of individuals to trade on trading venues that rely on stablecoins, thereby reducing liquidity in the Bitcoin market and affecting its value. This would also inevitably impact the Trust’s share price. 

Note, however, that they never explicitly speak of a “collapse,” but only of a sharp and rapid increase in volatility, as if to say that Bitcoin might be able in the long run even to overcome a colossal problem such as the depeg of USDT or USDC.