Featured Product

    ECB Paper on the Role of Stablecoins in Crypto-Asset Market

    August 29, 2019

    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

    Related Articles
    News

    BOE Article Explains Process for Bank Authorization in UK

    BoE published an article, in the Quarterly Bulletin for the third quarter of 2019, on how banks are authorized in the UK.

    September 20, 2019 WebPage Regulatory News
    News

    HKMA on Commencement of Regulatory Regime Under Insurance Ordinance

    HKMA announced the commencement of new licensing and regulatory regime for insurance intermediaries under the Insurance Ordinance from September 23, 2019.

    September 20, 2019 WebPage Regulatory News
    News

    APRA Revises Standard on Margin Rules for Uncleared Derivatives

    APRA revised CPS 226, which is the prudential standard on margin and risk mitigation requirements for non-centrally cleared derivatives.

    September 19, 2019 WebPage Regulatory News
    News

    SEC Adopts Rules and Amendments Under Regulatory Regime for Swaps

    SEC announced that it took a significant step toward establishing the regulatory regime for security-based swap dealers (SBSDs) by adopting a package of rules and rule amendments under Title VII of the Dodd-Frank Act.

    September 19, 2019 WebPage Regulatory News
    News

    FCA Welcomes ISDA Protocol on Narrowly Tailored Credit Events

    FCA published an update to its initial joint statement with the U.S. SEC and CFTC on opportunistic strategies in the credit derivatives markets.

    September 19, 2019 WebPage Regulatory News
    News

    PRA Issues Consultation on Prudent Person Principle Under Solvency II

    PRA, via the consultation paper CP22/19, has set out its proposed expectations for investment by firms, in accordance with the Prudent Person Principle (PPP).

    September 18, 2019 WebPage Regulatory News
    News

    PRA Proposal on Probability of Default and LGD Estimation

    PRA proposed, via the consultation paper CP21/19, an approach to implementing EBA’s recent regulatory products relating to Probability of Default (PD) estimation, Loss Given Default (LGD) estimation, and the treatment of defaulted exposures in the internal ratings-based (IRB) approach to credit risk.

    September 18, 2019 WebPage Regulatory News
    News

    BIS Formalizes Agreement to Set Up Innovation Hub in Hong Kong SAR

    BIS and HKMA signed the Operational Agreement on the BIS Innovation Hub Center in Hong Kong Special Administrative Region (SAR).

    September 18, 2019 WebPage Regulatory News
    News

    APRA Observations from Thematic Review on Recovery Plans of Insurers

    APRA issued a letter to general insurers and life insurers, outlining observations from a recent thematic review on recovery planning by insurers.

    September 18, 2019 WebPage Regulatory News
    News

    BNM Publishes Financial Stability Review for the First Half of 2019

    BNM published Financial Stability Review for the first half of 2019.

    September 18, 2019 WebPage Regulatory News
    RESULTS 1 - 10 OF 3853