Evergrande China crypto USDT

China Evergrande Debt Crisis Poses Systemic Risks on Tether?

Evergrande China crypto USDT

Real estate giant China Evergrande Group has recently fallen into a debt crisis. Both Evergrande’s stock and bond prices fell sharply, which greatly increased the risk of a default. More importantly, the cryptocurrency market, in particular ‘riskless’ stablecoins, may take a hit.

The world’s most-indebted developer is now selling property and other assets to pay back over $300 billion in debt. This week, prices of China Evergrande’s bonds have plummeted. The market expects Evergrande to be unable to refinance and meet the debt repayment deadlines.

Moreover, it turns out that the crypto market and the traditional financial market are deeply connected. China Evergrande’s debt crisis can lead to a chain reaction to the crypto market, in particular, stablecoins.

Tether (USDT), the world’s largest stablecoin, is the foundation of the crypto market. Global investors are using USDT to buy Bitcoin (BTC), or as collaterals. For now, USDT has a circulating market capitalization of $69.3 billion.

However, instead of US dollar cash, most of the reserve assets Tether holds to support USDT are commercial papers and bonds.

Likely, Evergrande’s debt crisis will drag down the market prices of all bonds and commercial paper issued by Chinese real estate developers. If Evergrande’s “debt bomb” explodes, the chain reaction will bring systemic risks on the leading cryptocurrencies such as USDT and Bitcoin.

WHAT IF: USDT, USDC Holding Evergrande Bonds as Reserves?

“In 2008, Lehman Brothers collapsed, dissolving $600B in US assets, leading us to the worst market crash since the great depression. $600B in assets,” said Cinneamhain Capital’s partner Adam Cochran on Twitter. “Right now, Evergrande has $200B~ in assets, and $300B in unserviced debt. $500B total. So it’s entirely on the same level as the assets that Lehman Brothers had.”

Adam Cochran highlighted the crypto market is sufficiently intertwined with the movements in the traditional market. “Regardless of what commercial paper you hold, bonds and commercial paper would take a hit. And some issuers may even fold,” Cochran says. Both Tether, and USDC stablecoin issuer Circle are holding commercial papers as reserve assets.

Lately, Tether tells The Block that it doesn’t hold any commercial paper issued by China Evergrande. The stablecoin issuer holds $30.8 billion in commercial paper and certificates of deposits.

“The vast majority of the commercial paper held by Tether is in A-2 and above rated issuers,” says Tether. Yet, the company would not disclose any details about whether it holds commercial papers issued by other Chinese companies.

Circle, issuer of the second stablecoin, USDC, holds corporate bonds and commercial papers as reserve assets. This August, Circle and its partner Coinbase announced the USDC reserves will be in cash and treasuries in full.

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