Will Dollar-Backed Stablecoins Suffer Hard in Case of Banking Failure? Community Ponders

Prominent crypto trader Willy Woo has touched on the topic of how a possible bank failure could affect regulated stablecoins backed by USD stored in those banks.

He asked expert Jake Chervinsky to comment on that; meanwhile, some in the crypto community seem to believe that if banks fail, so will stablecoins like USDC and PAX.

Question for general counsel at Compound

In his recent tweet, prominent trader and entrepreneur Willy Woo has tagged Jake Chervinsky, general counsel at Compound, and asked him to say what may happen to centralized regulated stablecoins like USDC (issued by Circle and Coinbase) and Paxos Standard (PAX).

Woo wondered what exactly might happen if the hypothetical scenario feared by financial experts since the start of the global pandemic were to come to pass—would banks and their USD be "bailed in," or would their "special dynamics" switch on?

Question for @jchervinsky, in the case of a banking failure and bail-ins start to take effect, what do you think will happen to regulated and backed stablecoins such as USDC or PAX? Does the money that's backing it get bailed-in or is their special dynamics at play here?

On Sept. 21, Forbes reported that U.S. financial institutions, including banks, are allowed to store USD for companies that back stablecoins by the Office of the Comptroller of the Currency (OCC).

Back then, Circle CEO Jeremy Allaire commented, saying that this action showed substantial progress for the integration of USD-backed stablecoins in the financial system of the U.S.

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Community suggests a negative outcome

In light of the approaching collapse of the USD, which has been widely predicted and discussed by numerous experts during the pandemic-driven lockdown this year—including Peter Schiff, Robert Kiyosaki and Anthony Pompliano—the question of what will happen to USD-backed stablecoins does not sound so abstract.

A crisis of the USD, a banking crisis: both, in theory, could affect regulated stablecoins that depend on the USD piles behind them.

In the comment thread, community members have mainly shared their negative thoughts on the answer to the question asked by Willy Woo.

Among USD-pegged stablecoins is also the most liquid USDT issued by Tether. However, if there are no questions about the USD reserves that back USDC, then constant extra emittances of USDT often raise people's eyebrows and cast serious doubt on whether the company is not printing those digital dollars out of thin air—similar to the U.S. Federal Reserve.