Stablecoins could trigger taxpayer bailouts, warns Nobel laureate

Digital tokens perceived as safe assets come with hidden risks for retail investors, says Professor Jean Tirole.

Jean Tirole, a Nobel Prize-winning economist, has warned about “insufficient supervision” of stablecoins and the possibility that governments will be forced into multibillion-dollar bailouts should the tokens unravel in a future financial crisis.

In an interview with the Financial Times, the winner of the 2014 Nobel Prize in economics said he was “very, very worried” about supervision of stablecoins and the possibility of a run by depositors if doubts materialised over the underlying reserve assets to which the digital tokens were pegged.

Stablecoins such as those issued by Tether and Circle — which are pegged to real-world assets — are expected to gain further popularity after the US government passed a law in July that paves the way for banks to launch their own digital assets linked to the US dollar and backed by securities such as US government bonds.

Global use of stablecoins has already risen to around $280bn as US President Donald Trump pushes to establish them as a pillar of mainstream finance.

While they could be regarded by retail users as “a perfectly safe deposit”, stablecoins could become a source of losses and trigger calls for costly government-led bailouts, Tirole, a professor at the Toulouse School of Economics, said.

He warned that the practice of backing stablecoins with US government bonds could become unpopular because of the underlying assets’ relatively low yields, citing previous instances when the returns of Treasury debt were “negative for a number of years” and payouts after inflation were even lower.

Stablecoin issuers could therefore be lured into the “temptation” to invest in different assets that “carry higher returns and are riskier”, he said.

Higher risks increased the odds of a scenario in which a stablecoin’s reserve asset lost value, triggering a run on the asset, he argued in an interview on the sidelines of a meeting of Nobel laureates in Lindau, Germany, last week.

In such a scenario, “the price of the stablecoins might [also] go down,” as they lost their peg to a sovereign currency, warned Tirole.

“If it is held by retail or institutional depositors who thought it was a perfectly safe deposit, then the government will be under a lot of pressure to rescue the depositors so they don’t lose their money,” he said, adding that over the past decades, only a few uninsured depositors of traditional banks ever faced losses.

Such risks could be managed if global supervisors had “sufficient manpower” and were “incentivised to be very careful”. However, Tirole warned this was a “big if”, in particular because “some key members of the [US] administration . . . have a personal financial interest in [cryptocurrency]. And beyond the personal interest, there’s ideology.”

Trump and members of his family have backed several crypto businesses, including one that issues a stablecoin called USD1.

Tirole’s warning comes a month after the European Central Bank cautioned that the rise of US dollar-backed stablecoins threatened to undermine its control over monetary policy.

The Bank for International Settlements said earlier this year that such tokens “perform badly” on requirements for being widely used as money.

Financial Times,
Stablecoins could trigger taxpayer bailouts, warns Nobel laureate
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Olaf Storbeck in Lindau, Germany
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