Can a Cryptocurrency Break the Buck?
Disruptions in a stablecoin’s value could wreak havoc on the broader crypto market unless regulators step in.
Hold up.
Photographer: Tiffany Hagler-Geard/Bloomberg
On Sept. 16, 2008, the day after Lehman Brothers filed for bankruptcy, the Reserve Primary Fund “broke the buck”: Its net asset value fell below $1 per share. The fund — often called the first money-market fund — held $785 million of Lehman commercial paper that was suddenly worthless. Although the paper represented only 1.2% of the fund’s total assets of $64.8 billion, demands for withdrawals escalated, and the fund lost two-thirds of its assets within 24 hours. This triggered a general run on money-market funds that stopped only when the U.S. Treasury issued an extraordinary guarantee of essentially all money-market fund liabilities. The episode underscored how important that $1 net asset value is to investors.
Certain cryptocurrencies known as stablecoins are today’s economic equivalent of money-market funds, and in some cases their practices should have us worried that they could break the buck, creating significant damage in the broader crypto market.