The cryptocurrency market, which has seen a significant 30% surge to $1.05 trillion this year, is causing disruptions in short-term funding markets, according to JPMorgan (NYSE:JPM). The rise is intensifying the competition with the $5.64 trillion money-market industry for Treasury bills, particularly in the wake of restrictions on access to the Federal Reserve's Overnight Reverse Repurchase agreement (ON RRP).
Stablecoin issuers such as Tether and USDC, with reserves amounting to $114 billion, are at the forefront of this disruption, according to Teresa Ho of JPMorgan. The recent growth in the cryptocurrency market has amplified the potential impact on Net Asset Value (NAV) from swift liquidations, a risk underscored by the collapse of TerraUSD in May 2022.
“While prohibiting access to non-standard money-market funds makes sense from a financial stability perspective, it risks potentially disrupting the already-soft floor for money market rates that the Fed’s ON RRP currently provides,” wrote the strategists.
The TerraUSD incident serves as a stark reminder of how quickly liquidations can affect NAV. In May 2022, the stablecoin faced a sudden collapse that highlighted the potential risks associated with these digital assets.
As the cryptocurrency market continues its upward trajectory this year, its influence over short-term funding markets is expected to persist. The competition with traditional money-market industry players for Treasury bills is likely to remain intense, especially given recent restrictions on access to Fed's ON RRP.
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