- BlackRock, the world’s largest asset manager, flagged risks for investors in its proposed Bitcoin ETF due to incidents involving stablecoins like Tether and Circle deviating from their $1 peg.
- Concerns stem from legal issues faced by Tether’s operators over false claims about reserves, resulting in penalties, as well as Circle’s reserves being partly held at a failed bank.
- These events show stablecoins can experience volatility despite their intention to be stable, posing risks for Bitcoin ETF investors due to the interconnectedness of cryptocurrencies.
BlackRock, the world’s largest asset manager, has highlighted potential risks associated with stablecoins for investors in its proposed iShares Bitcoin ETF. The firm is currently waiting for the U.S. Securities and Exchange Commission’s (SEC) review of its ETF.
What are Stablecoins?
Stablecoins like Tether (USDT) and Circle (USDC) are designed to maintain a value equivalent to a specific asset or currency, typically the U.S. dollar. However, BlackRock noted that despite their intended price stability, past events have shown that these digital assets can still experience significant price movements, which in turn can affect Bitcoin’s value.
Concerns Over Stablecoin Stability
The concerns stem from incidents involving Tether’s operators on February 17, 2021 and October 15, 2021. They faced legal actions due to false claims about their reserves not being fully backed by U.S. dollars. As a result of these legal issues, Tether was ordered to stop engaging with New Yorkers and incurred penalties totaling $61 million.
More recently, on March 10, 2023, USDC experienced a deviation from its $1 peg when Circle Internet Financial revealed that a portion of its reserves amounting to $3.3 billion had been held at Silicon Valley Bank after it went into FDIC receivership. This incident raised concerns about the stability and reliability of stablecoins.
Risks for Bitcoin ETF Investors
BlackRock has concluded that such indirect exposure to stablecoins could pose significant risks to investors in its Bitcoin ETF due to potential volatility, operational difficulties, possible manipulative practices, and regulatory challenges. The disclosure by BlackRock underscores the complexity and evolving nature of risks in the cryptocurrency market and highlights the need for investor awareness regarding the underlying assets of financial products tied to digital currencies.
Conclusion
BlackRock’s analysis of stablecoin risks shows that even assets designed to be stable can experience price fluctuations that impact cryptocurrencies like Bitcoin. This has implications for investors in Bitcoin ETFs and other crypto-linked products. As the crypto market matures, understanding these intricate connections and risk factors will be key.
