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The “primitive” stablecoin lacks mechanisms that maintain fiat stability: BIS
The answer is regulation again, although this time the proposed regulation looks a lot like central bank co-optation.
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Stablecoins do not have crucial mechanisms that guarantee the stability of the fiat money market, and an operating model that leaves regulatory control to a central bank would be A stablecoin is superior to a private model, according to a study published by the Bank for International Settlements (BIS).
The authors used a “money view” of stablecoins and an analogy to onshore and offshore USD settlement to examine the weaknesses of stablecoin settlement mechanisms.
According to the study:
“In both the Eurodollar and foreign exchange markets, central bank lending intervenes when private bank lending reaches the limits of its elasticity [that is, loses the ability to maintain par]with the ultimate goal of maintaining global parity ”
When Eurodollar holders tried to land their funds during the financial crisis of the late 2000s, the Federal Reserve provided other central banks with a $600 billion liquidity swap to protect the dollar
Related: BOE Governor Kills Cryptocurrencies and Stablecoins in Favor of ‘Enhanced Digital Money’
Stablecoins Bridge On-Chain and off-chain funds and remain on par with fiat USD through up to three “superficial” mechanisms: through reserves, over-collateralization, and/or an algorithmic trading protocol.
Reserves are essentially “an equivalent value of short-term safe dollar assets.” According to the authors, stablecoins incorrectly assume that their solvency – the ability to meet long-term demand – is based on their liquidity – the ability to meet short-term demand, whether dependent on reserves or an algorithm.
Furthermore, reserves are inevitably tied to the fiat money market. This ties the stability of stablecoins to the conditions of the fiat money market. However, when economic stress occurs, there are mechanisms in place to attempt to maintain bank liquidity both domestically and internationally. Such mechanisms are missing in stablecoins. One example the authors gave was this year’s banking crisis:
“Central banks were probably surprised to discover that the lender of last resort that backed Silicon Valley Bank in March 2023 was actually also the lender of the The last resort for USDC, a stablecoin, was.” which held significant deposits at the SVB as an alleged liquidity reserve.”
Furthermore, stablecoins must remain the same among themselves. Bridges are another sore point. The authors compare blockchain bridges to forex traders, who rely heavily on loans to offset imbalances in order flow. Stablecoins are not able to do this. The higher interest rates common on the chain only make their task more difficult.
Ok, Boomer
— psswrd12345 (@psswrd12345) November 17, 2023
The study found that the Regulated Liability Network offers a model solution to the difficulties faced by stablecoins. In this model, all claims are processed through a single ledger and fall within one regulatory framework. “The commitment to a full-fledged banking system that includes the central bank and thus has a credibility that today’s private crypto stablecoins lack,” the authors said.
The BIS is paying increasing attention to stablecoins. In early November, a study was published examining examples of stablecoins that failed to maintain their set value. This, as well as the legislative attention that stablecoin has received in the European Union, the United Kingdom and the United States, is evidence of its increasing role in finance.
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