ECB Paper on the Role of Stablecoins in Crypto-Asset Market
ECB published an occasional paper that describes stablecoins and assesses to what extent they can maintain a stable value, without entering into the discussion about the potential macroeconomic impact from either a financial stability or monetary policy perspective. The paper provides an overview and taxonomy of the stablecoin. It analyzes the trade-off between innovation and the volatility of different types of stablecoins and their possible role in the crypto-asset market and beyond.
This paper describes the often complex functioning of different types of stablecoins and proposes a taxonomy of stablecoin initiatives. To this end, it relies on a novel framework for their classification, based on the three key dimensions that matter for crypto-assets: accountability of issuer, decentralization of responsibilities, and what underpins the value of the asset. The analysis of different types of stablecoins shows a trade-off between the novelty of the stabilization mechanism used in an initiative and its capacity to maintain a stable market value. The analysis in this paper shows that the relationship between the innovation of a particular type of stablecoin and its capacity to limit price volatility expressed in a currency of reference is strong and these two characteristics are inversely related. While less innovative stablecoins could provide a solution for users seeking a stable store of value, especially if legitimized by adherence to the standards typical of traditional businesses, the jury is still out on the role that more innovative but volatile stablecoin types may play in the future.
The paper states that some on-chain collateralized stablecoins have proven they can withstand large fluctuations of underlying collateral, but it is unclear whether this is due to effective stabilization mechanisms or to the stickiness of users driven by a strong interest in protecting their privacy and/or remaining outside the financial system. Finally, the paper concludes that algorithmic stablecoins are still a theoretical alternative rather than a practical solution. Their development warrants close observation as they may give rise to renewed debates in the academic and central bank communities. Uncertainties concerning the governance and regulatory treatment of stablecoin initiatives exist. An uptake in the usage of stablecoins may require improvements to the governance of such initiatives, including procedures to update the smart contracts at the core of the initiative and a cyber-security framework. However, stablecoin initiatives with a clear governance framework may nevertheless be hampered by the uncertainty relating to the lack of regulatory scrutiny and recognition. This is especially relevant, given that financial institutions could use the same technology for the recording of traditional assets and make stablecoins redundant in the use of distributed ledger technology outside crypto-asset markets.
Related Link: Occasional Paper (PDF)
Keywords: Europe, EU, Banking, Securities, Crypto Assets, Stablecoins, Financial Stability, Research, Distributed Ledger Technology, ECB
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