Inside the $93M fund loss that sparked a ‘narrow-minded’ stablecoin ban

Key Takeaways 

Why is Bank Policy Institute against stablecoin rewards? 

The lobby group warned that unregulated stablecoin yields could trigger liquidation cascades and wider market contagion.

How did the crypto community react to BPI’s warning? 

The industry called BPI’s framing “narrow-minded” and dishonest. 

The Bank Policy Institute (BPI), a banking lobby group, has doubled down on crypto risks warnings, especially stablecoin depegs. 

According to the BPI, crypto market shocks, such as the one on the 10th of October crash triggered by the depegging of stablecoin USDe and the ensuing $20B liquidation cascade, could swiftly spill over into the traditional market.

Especially if the sector gets more integrated into the rest of the financial industry. 

Additionally, the rush for stablecoin rewards via leveraged DeFi loops could accelerate liquidation risks, as the deposits aren’t insured. However, the current regulation doesn’t cover these risks. BPI added,

“The GENIUS Act was never intended to target these risks, and the current market structure bills under consideration would do nothing to reduce them.”

Source: X

Crypto community reactions

There’s indeed a risk associated with leveraged plays linked to farming DeFi stablecoin yields.

In fact, a fund lost $93 million after a recent stablecoin depegging event linked to Stream Finance. Imagine a similar scenario with a major stablecoin ticker well entrenched in traditional financial markets. 

BPI’s solution? Ban these rewards and maintain financial market stability.

The banking lobby, however, has been calling for a ban for a different reason: A perceived threat that the yield could attract depositors away from banks to crypto.  

So the DeFi and other genuine risks raised were overshadowed by its conflict of interest.

Instead, the lobby should call for more DeFi transparency, not an outright ban on stablecoin rewards, one user rebutted. 

Source: X

For his part, Alexander Grieve, VP of Government Affairs at Paradigm, called the BPI framing “narrow-minded.” He countered, 

“Some pretty bad-faith and narrow-minded characterizations in here. ‘DeFi = bad, so stablecoins = bad.’ The Bank Policy Institute seems to have taken the ‘if you can’t beat them, destroy them’ approach.”

Banks vs. builders

After failing to amend the stablecoin law, the GENIUS Act, the banking lobby is reportedly eyeing the CLARITY Act to secure its interests. 

Meanwhile, the stablecoin market cap has surpassed $300 billion, and transactions have exceeded $1 trillion. It has also decoupled from the broader crypto market post-GENIUS Act, underscoring organic adoption.  

Source: a16z crypto