Can I Interest Your CFO In A Stablecoin Deposit?

Can I Interest Your CFO In A Stablecoin Deposit?

Bitcoin is volatile. That's perhaps the only thing crypto proponents, detractors and everyone in-between can agree on. I've argued volatility in Bitcoin (and Ether, for that matter) makes it a non-starter for the vast majority of portfolios. The simple figure, below, underscores the point. I've also variously suggested that corporate treasurers who add Bitcoin to balance sheets are making a potentially serious error, unless the company is engaged in parallel lines of business akin to RBC's
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12 thoughts on “Can I Interest Your CFO In A Stablecoin Deposit?

  1. There is no risk (other than counterparty) and no leverage. The returns come from arbitrage. I’m surprised you don’t know this. As more dollars enter the crypto ecosystem, these rates will fall. For now, there is massive demand for lending stablecoins.

    1. With all due respect, this comment is patent nonsense.

      A 7% return on parked cash in a world where risk-free rates are zero (or below) isn’t risk-less, Kamil. That’s an extraordinarily naive thing to say.

      These are not “deposits” in any traditional sense, they are not risk-less, and nobody should think of them as such.

        1. That’s not “risk-free,” Kamil. But more to the point, listen to what you’re suggesting. You’re saying corporate treasurers should lend their cash reserves to a crypto shadow bank so that hedge funds can play the basis in Bitcoin. That’s sheer lunacy. Any large shareholder in a company caught doing that should immediately pressure the board to reverse the decision or else sell their entire stake. I don’t even know why I’m having this discussion. It’s nuts. And besides that, there’s nothing here that says that’s the only way this has to work. Who’s to say the shadow banks don’t lend the money to institutional investors who find other ways to pay the interest? In other words: What happens if there’s an even more profitable opportunity out there for that borrowed cash? You reckon they won’t take it? And do you seriously think regulators are going to allow a sprawling crypto shadow banking network to develop and prosper? This whole thing is laughable.

  2. If I recall, Bernie Madoff was paying 8%.

    “Stable Coins” are an elaborate Ponzi scheme.

    No one can figure out where the money has gone because they are not meant to figure out where the money has gone.

  3. In my view, earning high interest lending out stablecoins is a similar type of investment to earning high interest on a bank deposit in an unstable emerging market that’s trying to maintain a 1-for-1 currency peg. i.e. it’s a short vol trade where the risk is hard to quantify ex-ante but catastrophic when it materializes.

    Given stablecoins are functioning as ‘shadow’ US dollars, similar to how the eurodollar market evolved pre-GFC, it’s not surprising we’re seeing more central bank officials coming out and raising the financial stability risks (e.g. Brainard last week), especially as stablecoin issuance has exploded the past few months (total USD stablecoin market cap is now > US$100b).

    Stablecoins are either “money” issued by shadow banks (as they function as ‘money’ in crypto ecosystem) or they are unregulated money market funds. Either way, a regulatory response/crackdown should be expected.

  4. In my opinion, the main problem with this gambit is not that a given BTC spot/futures trade won’t pay off consistent with the quoted numbers.

    The main problem, I think, is that the window of opportunity for profitable trades is short and unpredictable.

    For example, let’s look at the long spot/short futures trade described in the March 2021 BBG article mentioned above. Today, just two months later, BTC00 is $36,805, September 2021 futures contract BTCU21 is $36,335, so you get a -4% annualized return on that long spot/short futures trade.

    In just two months, the can’t-miss no-brainer high-return trade vanished. Sure, maybe you can buy the spot on a dip or snatch an uptick on the future, and make a profitable trade – and maybe, a minute or a day later, you can’t. It’s day to day, at best. But . . . you’re promising depositors a guaranteed 7% annual return from this?

    So, look at the treasurer’s dilemma. When he puts the company’s cash in the Circle account, and a couple months later the high-return “allegedly safe” trade vanishes, what happens? Does Circle renege on the 7% interest it promised (and you have to explain yourself to the CEO CFO and board)? Does Circle go find another trade, that isn’t quite as “allegedly safe” (and you have to re-explain the risk-beneift to the CEO CFO Board, assuming you even know what Circle’s done)? Does Circle pay your interest from recent deposits (and you’re now participating in a Ponzi scheme)?

    Any competent corporate treasurer will see that the promised 7% return is very fragile, and that the risk to his own career far outweighs the potential return to himself and the company.

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