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Preventing a Stablecoin Liquidity Crisis

There is no sound argument for applying lender-of-last-resort protection to privately issued cryptocurrencies. But regulators can prevent the all-too-predictable liquidity squeeze caused by a run on stablecoins – including by regulating them out of existence if necessary.

LONDON – Liquidity is to the modern economy what lubricant is to a car engine. Provide enough of it, and things run smoothly; come up short, and the result is a red-hot, smoke-spewing mess. But whereas lubricating oil is easy to gauge, financial liquidity is here today and gone tomorrow. A financial crisis is always around the corner, and the next one could result from the rapid rise of cryptocurrencies – and especially so-called stablecoins.