What’s a Stablecoin?
- Think of it like digital cash: Tether’s stablecoin (USDt) is a cryptocurrency pegged to the US dollar. For every USDt in circulation, Tether claims to hold $1 in reserves (like cash or bonds).
- Goal: Keep prices stable, unlike Bitcoin, which can swing wildly in value.
Why Are European Banks at Risk?
- Strict Rules Backfire:
- European regulations require stablecoin companies to keep 60% of their reserves in regular bank accounts (not protected by insurance).
- Example: If a stablecoin has €10 billion, €6 billion must sit in these risky accounts.
- Insurance Is Too Small:
- Banks in Europe only insure up to €100,000 per account. For a company with billions, this is like “using a water pistol to put out a forest fire” if the bank fails.
- Banks Lend Too Much:
- Banks lend out most of the money they hold. If too many people want their money back at once (a bank run), the bank can’t cover it.
- Example: If a bank has €6 billion but lends out 90%, it only has €600 million left. If people ask for €2 billion, the bank collapses.
The Domino Effect
- Big Banks Avoid Stablecoins: Major banks like UBS won’t work with stablecoin companies, forcing them to use smaller, weaker banks.
- Small Banks = Big Risk: These banks are like “shaky bridges” – if one fails, it could trigger a chain reaction.
What’s Next?
- Tether’s US Expansion: Tether plans to launch in the US soon, calling the US dollar the “gold standard” for stablecoins.
- Market Growth:
- Tether’s USDt holds 66% of the stablecoin market (worth ~$150 billion).
- The US government predicts the stablecoin market could hit $2 trillion by 2028.
Key Takeaways
- Risk for Banks: Strict rules + risky lending = higher chance of bank failures.
- Stablecoins’ Role: They’re growing fast but depend on a fragile banking system.
- Watch Europe: Ardoino warns, “Many banks could collapse in the next few years.”
Simplified analogy: Imagine a game of Jenga. If banks keep pulling out blocks (lending too much), the tower (financial system) could crash down.