JPMorgan: Crypto Stablecoins Like Libra May Face Bottlenecks

Stablecoins, a fast-growing subset of cryptocurrencies designed to avoid the large fluctuations of Bitcoin and Ether, could fail to function properly in periods of stress, according to JPMorgan Chase & Co.

While the total value of all stablecoins is less than $5 billion, the low-volatility tokens are poised for rapid growth, and none more so than the Libra coin developed by Facebook Inc. (FB), said the analysts led by Joshua Younger.

Yet they are vulnerable to bottlenecks and seizures because they lack the same short-term liquidity facilities common in other payments systems, meaning there’s a risk that activity in the coins will grow faster than the currency can safely support.

“Stablecoins, and Libra in particular, have the potential to grow substantially and ultimately shoulder a significant fraction of global transactional activity,” the analysts said in a note to clients on Thursday. “However, as currently designed and proposed, they do not take into account the microstructure of operating such a payment system. The risk of payment system gridlock, particularly during periods of stress, could have serious macroeconomic consequences.”

Another danger facing Libra, which Facebook plans to launch next year in partnership with a diverse group of corporate and charitable partners, is negative yields, the analysts said.

Libra relies on the income from collateral in the reserve account, which will be fiat currencies including the dollar and euro and government securities, to pay for maintaining the network and rewarding association members. Yet yields on most major currencies are negative yields.

“Any system that relies on reserve-asset income to fund operational and other ongoing costs becomes unstable in a negative yield world,” said the analysts. “With more than half of high-quality short-term sovereign debt already negative, the vast majority of the remainder made up of U.S. government securities, and trends pointing towards global monetary easing, a fully negative yielding Libra reserve has become a plausible (some would argue likely) risk.”

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