DFC

The US Federal Reserve Board (FRB) published a note that describes the general lifecycle of a stablecoin from its issuance to its redemption. It then categorizes various stabilization mechanisms and discuss how they work in practice. A key observation is that, although several stablecoins may peg their value to the same real-world asset, stabilization mechanisms can vary greatly in terms of maintaining stability with the reference asset, and so may have varying susceptibilities to the risk of runs from the stablecoin to the reference asset.

The Bank of Canada published a paper on the utility of stablecoins for retail payments. It finds that certain stablecoin arrangements offer end users greater control of their privacy, facilitate more rapid innovation and have the potential to increase transaction speeds, particularly for cross-border payments. At the same time, stablecoins may provide less consumer protection for fraud, present higher risks to the payment system and to efforts to combat financial crime, and be costlier relative to traditional payment arrangements. The paper's findings suggest that stablecoin arrangements do not currently serve as substitutes for the suite of traditional payment arrangements but instead address niche use cases or user segments that value their benefits and can accept their risks or costs.

"Fiat-referenced cryptoassets have seen tremendous growth in recent years. Since these types of cryptoassets have the potential to perform many of the functions of money, they could become more widely used to pay for everyday goods and services. Fiat-referenced cryptoassets could make payments faster and more efficient due to features of the novel technology they are built on. However, they could also pose financial stability risks, some of which were illustrated in the market turmoil of May and November 2022, highlighting the need for adequate regulation and supervision. Work is underway, domestically and internationally, to develop a robust regulatory framework to mitigate the risks these types of cryptoassets can pose to holders, the financial system and the economy. A timely and comprehensive regulatory approach in Canada will ensure that fiat-referenced cryptoassets can deliver potential benefits without posing unnecessary risks."

The Bank of England published its supervision of financial market infrastructures 2022 Annual Report. It reports that the Financial Services & Markets Bill, published in July 2022 and scheduled to complete in 2023 seeks to bring systemic stablecoins into the Bank’s regulatory remit, and bring the UK regime in line with standards discussed. The Bank is now working on a regulatory framework for systemic stablecoins and plans to consult on this in due course. Alongside regulation, another key component of a stablecoin regime is the potential application of the FMI Special Administrative Regime to systemic stablecoin firms. The Bank, working with His Majesty's Treasury, will continue to develop this regime to ensure it reflects international CPMI-IOSCO guidance.

It's common knowledge that stablecoin issuers like Tether, Paxos, and Circle run pegs. What isn't commonly known is that crypto exchanges like Binance also run their own versions of stablecoin pegs.

"How might stablecoin affect inflation? It depends on where the stablecoin issuers put the reserve assets at and whether the issuers are bank or non-bank."

The National Bureau of Economic Research (NBER) published a paper that shows how stablecoins can maintain a constant price even though they face run risk and pay no interest. Stablecoin holders are indirectly compensated for stablecoin run risk because they can lend the coins to levered traders. Levered traders are willing to pay a premium to borrow stablecoins when speculative demand is strong. Therefore, the stablecoin can support a $1 peg even with higher levels of run risk. However, when speculative demand falls, stablecoin issuers can keep their debt trading at par only by moving to a safer portfolio or allowing redemptions. Such reallocation or change in stablecoin supply can cause disruptions in the real economy. Stablecoin issuers will need to adjust quickly if expected returns for cryptocurrencies fall; otherwise, they face the risk of collapse. These adjustments can cause disruptions in the markets they invest in, like the commercial paper market that provides financing to the real economy.

"Here are four things that Tether can do to ensure that the next time the crypto economy undergoes a shock, tether stays steady."

"Even though the rate to borrow Tether is higher than the rate to borrow USD Coin, it may be worthwhile for me to go with the a Tether loan if I think that the odds of Tether failing justify the higher financing cost. We can even go a bit further and say that the 0.9% premium on a Tether loan is the market's best estimate of the odds of Tether losing its peg relative to USD Coin losing its peg. So for all those would-be stablecoin analysts out there, keep your eye on Aave's USD Coin-Tether spread. It's a good indicator of stablecoin risk."

"There have been some slight fluctuations in USDD’s price at the start of the new year, as the stablecoin has dipped to the 97-cent range on a few occasions in 2023. After Terra’s stablecoin depegging event in May 2022, USDD started to slip slightly below the $1 peg, causing anxiety in the crypto industry. A number of other stablecoins saw similar deviations. On June 19, 2022, USDD reached a low of 92.8 cents per unit, but the stablecoin managed to regain the $1 peg, trading between 98 cents and 99 cents per unit."

"As our first State of the USDC Economy annual retrospective spells out, the green shoots of global utility value are sprouting up everywhere, catalyzing a wave of open, responsible financial services innovation that can improve pathways to prosperity, while protecting the integrity of the global financial system."

The National Australia Bank (NAB) aims to launch an Australian dollar-pegged stablecoin (AUDN) in the middle of 2023. Its purpose would be to allow its customers to settle transactions in real-time using Australian dollars, and several other purposes including "carbon credit trading, overseas money transfers and repurchase agreements." The stablecoin will launch on the Ethereum and Algorand blockchains. NAB is the second major Australian bank to be involved in the creation of a stablecoin. Earlier, Australia and New Zealand Banking Group (ANZ) teamed up with crypto custodian Fireblocks to mint a stablecoin pegged to the Australian dollar.

"There is no law that bans U.S. banks from issuing paper or digital private banknotes, American Institute for Economic Research senior fellow Thomas Hogan writes."

Moody’s is reportedly working on a scoring system for stablecoins that will include an analysis of up to 20 stablecoins based on the quality of attestations on the reserves backing them. The project is still in early stages and apparently won’t represent an official credit rating.

The Federal Reserve Board issued a policy statement to promote a level playing field for all banks with a federal supervisor, regardless of deposit insurance status. The statement makes clear that uninsured and insured banks supervised by the Board will be subject to the same limitations on activities, including novel banking activities, such as crypto-asset-related activities. The statement also makes clear that uninsured and insured banks supervised by the Board would be subject to the limitations on certain activities imposed on national banks, which are overseen by the Office of the Comptroller of the Currency. The equal treatment will promote a level playing field and limit regulatory arbitrage... The Board generally believes that issuing dollar- denominated tokens (dollar tokens) using distributed ledger technology or similar technologies on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices. The Board believes such tokens raise concerns related to operational, cybersecurity, and run risks, and may also present significant illicit finance risks, because—depending on their design—such tokens could circulate continuously, quickly, pseudonymously, and indefinitely among parties unknown to the issuing bank. Importantly, the Board believes such risks are pronounced where the issuing bank does not have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.

"In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional forms of credit creation. In contrast, a narrow bank approach for digital currencies can lead to disintermediation of traditional banking, but may provide the most stable peg to fiat currencies. Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress. "

The Hong Kong Monetary Authority (HKMA) issued the consultation conclusion to the discussion paper on crypto-assets and stablecoins. Respondents were supportive of regulating stablecoins with a risk-based and agile approach. The respondents also broadly supported the need to take into account the latest market developments and draw reference from the discussion of international regulatory bodies when developing the relevant regulatory regime. he HKMA will announce the regulatory arrangements and next steps in due course.

"Although the terminology used to define stablecoins is currently ambiguous, they can be broadly defined as a specific type of crypto-asset that aims to maintain a stable value relative to a specified currency, asset, or pool of currencies/assets. This paper characterises different types of stablecoins according to the stabilisation mechanism used and analyses the current stablecoins’ market. It also describes the regulatory framework applicable to stablecoins in a few selected jurisdictions. The main focus of the paper is the identification of the main risks associated with stablecoins, particularly the so-called global stablecoins, i.e., those stablecoins with a potential to be adopted across different jurisdictions and achieve a substantial volume. Finally, the paper concludes that continuous monitoring of the stablecoins’ market should be pursued, given their increasing relevance and potential impact on the financial sector."

Finland-based Membrane Finance has released a fully-reserved stablecoin backed by the euro. The company is licensed by the Finnish Financial Supervisory Authority (Fin-FSA) and claims that the new ”EUROe” coin is “the first and only ... crypto stablecoin.regulated by an EU-based financial authority.

Using trades between the stablecoin treasury and private investors, we quantify how improved arbitrage design stabilizes the price of the dominant stablecoin, Tether. We identify two 2019 design reforms: migration of Tether from the Omni to the Ethereum blockchain and decentralization of issuance. These reforms increased investor access to arbitrage trading with the treasury, reducing the absolute size of peg deviations by half. Further evidence for the importance of arbitrage design is present in the stability mechanism of the stablecoin DAI and in the creation of authorized merchants for the pegged coin WBTC.

The US Federal Reserve Board issued a policy statement that said that issuing dollar-denominated tokens on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices. The Board believes such tokens raise concerns related to operational, cybersecurity, and run risks, and may also present significant illicit finance risks, because—depending on their design—such tokens could circulate continuously, quickly, pseudonymously, and indefinitely among parties unknown to the issuing bank. Importantly, the Board believes such risks are pronounced where the issuing bank does not have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.

A new report from JP Morgan and Oliver Wyman touts the benefits (versus stablecoins) of blockchain-based deposit tokens issued by licensed depository institutions which evidence a deposit claim against the issuer. However, it points out that while deposit tokens that run on public unpermissioned networks offer the greatest degree of interoperability and benefits, private permissioned ledgers introduce fewer challenges for regulated institutions, and would require appropriate alternative controls to create a trusted environment for funds transfers.

PayPal is reportedly pausing work on its stablecoin as regulators increase scrutiny of cryptocurrencies and Paxos,  a key partner in the project, faces a probe by the New York State Department of Financial Services. A PayPal official confirmed that the firm is exploring a US dollar backed stablecoin, adding that “if and when we seek to move forward, we will, of course, work closely with relevant regulators.”

The WSJ is reporting that financial services company Cantor Fitzgerald is helping Tether oversee a $39 billion bond portfolio comprised of United States Treasury securities. The report indicates that some firms on Wall Street are willing to support crypto service providers despite ongoing regulatory concerns facing the industry. "

"Forbes has learned that Tether moved $37 billion of its reserves to an offshore bank called Capital Union in 2021. The move occurred after settling with the New York Attorney General’s office over claims it had misrepresented its finances. Tether also enlisted another Bahamian bank, Ansbacher, to hold some of its reserves. Tether has additionally been using New York financial services giant Cantor Fitzgerald as a custodian of U.S. Treasury bills. (Tether recently reported that more than half of its consolidated assets were in Treasuries last quarter.)"

"The crypto ecosystem relies on stablecoins as a cheap and plentiful form of dollar liquidity. If all stablecoins were classed as securities, dollar liquidity for onshore crypto exchanges and platforms would dry up as stablecoin issuers either went offshore or out of business. It is very hard to see what would replace it, at least in the short term: U.S. dollars (and other fiat currencies) are not liquid on crypto exchanges, because to move them around requires banks, and non-USD stablecoins have gained little traction thus far. So trading crypto onshore would become much more expensive and considerably riskier. The dollar liquidity drought could also severely impact DeFi, because that relies on stablecoins (or derivatives of stablecoins) as collateral. So the SEC's action could bring down the onshore crypto ecosystem. "