CBI StablecoinWhitepaper July2022

PART 1 PART 2 PART 3 PART 4 PART 5 PART 6
Introduction Stablecoins Stablecoin Policy Policy Conclusion

and Stablecoin Use Cases Considerations Recommendations
Arrangements
STABLECOINS:
COINBASE
WHITE
PAPER
JULY 2022
STABLECOINS WHITE PAPER 2
Table of contents
1 Introduction 3
1.1. Stablecoins and stablecoin arrangements 4
1.2. Background and roadmap 5
1.3. About Coinbase 6
2 Stablecoins and stablecoin arrangements 7

2.1. Types of stablecoins 10
2.1.1. Fiat-backed stablecoins 11
2.1.2. Crypto-backed stablecoins 13
2.1.3. Algorithmic stablecoins 14
2.2. Stablecoin arrangements: custodial and non-custodial 16
3 Stablecoin use cases 19

3.1. Digital asset trading – increasing digital asset market liquidity 19
3.2. Payments – faster, cheaper money transfer 21
3.3. Broadening access to financial services – financial inclusion 23
3.4. Next-generation applications – growing diversity of DeFi, 23
tokenization, and web3

4 Policy considerations 25
4.1. Financial stability and run risk 25
4.2. Operational resilience 27
4.3. Preventing financial crimes 28
4.4. Consumer protection and market integrity 28
4.5. Monetary policy 29
4.6. Concentration of economic power 31
4.7. Commercial law clarity and certainty 32
5 Policy recommendations 33
5.1. Which entities should be permitted to issue fiat-backed stablecoins? 33
5.2. What requirements should apply to fiat-backed stablecoin arrangements? 34
5.3. What role should algorithmic stablecoins have in the marketplace? 35
5.4. What rights should you have as a stablecoin holder? 36
5.5. How should stablecoins interact with other forms of money 37
6 Conclusion 39
Disclosure: USD Coin (USDC) is a stablecoin issued by Circle. Coinbase and Circle co-founded the Centre Consortium, which supports and administers
the governance of USDC. Coinbase has a financial interest in USDC. For more information, please refer to our annual and quarterly SEC filings.
PART 1 Introduction
Money takes many forms. It is conventionally defined as a store of value, a
medium of exchange and a unit of account. All kinds of objects have been
used as money in different times and places, from seashells,1 tally sticks,2
or even goats,3 to coins and paper notes. Whatever form it takes, money has
a social dimension: it works because people believe in it and want to use it.
1
Wikipedia, Shell money Most people today think of money as either hard currency or bank deposits.
In the future, we believe stablecoins will be used as money, just as easily as
2
BBC, What tally sticks tell us hard currency and bank deposits are today. Like any early stage technology,
about how money works stablecoins are not yet widely understood, and their development has
(10 July 2017)
stretched policy makers’ ability to keep up. We offer this whitepaper to help
3
Financial Times, raise awareness of the underlying issues and to ground policy discussions in
Cryptocurrencies untether a solid, factual understanding of what stablecoins are and how stablecoin
the goat of sovereign tender
(21 Feb 2019) arrangements work.
Stablecoins are digitally native payment

instruments that are designed to maintain
a stable value compared to an external
reference asset, usually a fiat currency such
as the U.S. dollar.
They provide a bridge between the traditional financial system and the
cryptoeconomy, allowing fiat currencies to exist in a form that can move
more freely and more efficiently on blockchains. Unlike conventional
payment methods, stablecoin payments require no centralized intermediary.
As blockchain technology continues to improve, stablecoins could make it
possible to send money to anyone, anywhere in the world as easily as sending
a text message. Stablecoins could therefore be the foundation of a new era of
innovation in financial services. But, like all financial instruments, they also
present risks that need to be well understood and appropriately addressed by
financial regulators.
Policy choices about stablecoins will fundamentally shape the future of

the global financial system as it transitions to digitally native environments
and distributed ledger technologies. Making good decisions requires
understanding the different types of stablecoins and the arrangements
underlying them. Our whitepaper explains how different stablecoin
arrangements operate, the current and potential uses of stablecoins, and
how to consider regulatory approaches that balance their potential benefits
against their risks. The overarching goal is to provide insights and perspective
to help shape the regulatory path forward.
1.1 Stablecoins and stablecoin arrangements
Two concepts frame the rest of this whitepaper: stablecoins and stablecoin
arrangements.
Stablecoins are the actual tokens, i.e., digitally native payment instruments
on a blockchain. A “stablecoin arrangement” is the ecosystem around a
stablecoin, including the processes, people, and entities involved in using it.
The processes include issuing and redeeming the stablecoin, transferring it
between users and maintaining the stablecoin’s peg. The people and entities
include not only the stablecoin’s holders and its issuer (which could be a legal
entity or protocol), but also many others, such as custodians, developers,
exchanges, market makers, and arbitrageurs.
Throughout the whitepaper, we use the term “stablecoin” to refer to a digital

asset that is supposed to maintain a stable value. We want to use language
that is familiar to most crypto market participants, and use technical terms
only where their precision is important from a policy perspective. For the same
reason, we use the following terms for three main types of stablecoins, based
on the different mechanisms they use to maintain their value:
• Fiat-backed: Stablecoins backed by reserve assets in the traditional

financial system, such as cash, cash equivalents, or securities
• Crypto-backed: Stablecoins backed by digital assets that exist and are

used independently from the stablecoin arrangement
• Algorithmic: Stablecoins that are not backed by any reserve assets, that
instead seek to maintain their value using algorithms to adjust their supply
relative to another digital asset within the same stablecoin arrangement
These stablecoins fall into two types of arrangements:
• Custodial arrangements: Fiat-backed stablecoins have reserve assets

held in custody by the stablecoin’s issuer, and the issuer bears primary
responsibility for issuance, redemption, and maintaining the stablecoin’s
peg
• Non-custodial arrangements: Crypto-backed and algorithmic stablecoins

do not have reserve assets held in custody, and the core functions of the
stablecoin arrangement are performed by automatic operation of smart
contracts on a blockchain
These are general categories, and some stablecoins combine features from
more than one of them, as the following sections of this whitepaper discuss in
more detail.
1.2 Background and roadmap
Section 2 of the paper provides an overview of the stablecoin market and types
of stablecoins. Approximately $145 billion in stablecoins are in circulation
today.4 Fiat-backed stablecoins represent 91.7% of this amount, and nearly all
are pegged to the U.S. dollar.5 Fiat-backed stablecoins have generally been
successful in maintaining their pegs, though as we discuss below they are
not without risk. Some crypto-backed stablecoins have also established good
track records, even through periods of market dislocation. DAI, for example,
makes innovative use of smart contracts and over-collateralization to protect
4
The Block, Stablecoins,
its value against the volatility of prices of other digital assets. In contrast,
as of 30 June 2022 algorithmic stablecoins like TerraUSD (UST) have attempted to use smart
contracts to maintain their pegs without collateral, and almost all of these
5
Id. have failed. We discuss the successes and the failures in Section 2.
Section 3 discusses the expanding range of stablecoins’ potential uses. The

earliest and heaviest use of stablecoins is for paired-trading with other digital
assets on blockchains. Stablecoins provide market participants the simplicity
and efficiency of pricing assets in a common currency, near-instantaneous
settlement of digital asset transactions, and a way to retain assets on-chain
with less exposure to volatility. But stablecoins also have the potential for
mainstream commercial uses such as merchant payments and can even
reshape parts of traditional finance by which disadvantaged communities
have been underserved. For example, the global average cost of sending a
$200 remittance was $12.08 in 2021, and in many remittance corridors the
6
BIS, The journey so far: making
cross-border remittances work typical cost is much higher.6 Stablecoins, in addition to other cryptocurrencies,
for financial inclusion (15 June make it possible for these payments to be made instantaneously at a much
2022); Coinbase Institute, Crypto
& Remittances (30 June 2022) lower cost.
Section 4 covers a wide range of policy considerations that will inform

decisions in many jurisdictions on the regulatory frameworks for stablecoin
issuance and use. These include:
• Financial stability and run risk

• Operational resilience
• Prevention of financial crimes
• Consumer protection and market integrity
• Monetary policy
• Competitiveness
• Legal rights of stablecoin holders
In Section 5 we conclude with our recommendations regarding the path

forward for stablecoin policymaking. Most importantly, we believe regulatory
frameworks should not impose a one-size-fits-all approach on stablecoins.
Fiat-backed stablecoins should meet rigorous requirements to support
consumers’ confidence. Regulatory frameworks should also hold space for
continued experimentation with crypto-backed and algorithmic stablecoins,
within guardrails for consumer protection and financial stability.
1.3 About Coinbase
Coinbase provides a trusted and easy-to-use platform for accessing the

broader crypto economy. Today, there are approximately 98 million verified
7
Coinbase, About Coinbase, users, 13,000 institutions and 230,000 ecosystem partners in over 100
as of 30 June 2022
countries who rely on Coinbase to easily and securely spend, save, earn, and
use stablecoins and other cryptocurrencies.7 We offer custody services for 212
8
The Coinbase Blog, Listing
assets on Coinbase is free, and
digital assets and trading services for 172 digital assets, including stablecoins,
always has been (31 May 2022) on our platform.8
Coinbase favors a comprehensive approach to the regulation of digital asset

activities, tailored to the benefits and risks raised by these activities. We
strongly believe that regulation of digital asset activities should not simply
seek to pigeonhole new activities into existing categories, which are often
ill-suited to the task. Designing an effective regulatory framework calls for
9
Coinbase, Digital Asset Policy
Proposal (#dApp) (14 Oct 2021) careful balancing of risks, benefits, and tradeoffs. We actively contribute
to the policy discussion through publications like our Digital Asset Policy
10
Coinbase, Public Policy Proposal (#dApp),9 responses to regulatory proposals and consultations,10
and research from the Coinbase Institute.11 This whitepaper is a further
11
Coinbase, Coinbase Institute contribution to that important discussion.
PART 2 Stablecoins and stablecoin arrangements

Stablecoins have rapidly gained popularity in the past few years in response to
users’ demand for stable and secure digital assets. As shown below, the total
market capitalization of stablecoins globally is currently around $145 billion,
12
The Block, Stablecoins, roughly 1.4 times the $106 billion market capitalization as of the end of May
as of 30 June 2022 2021, and 13 times the $11 billion market capitalization as of May 2020.12 The
four largest stablecoins today are USDT, USDC, BUSD, and DAI, which together
13
Id. comprise roughly 94.8% of the market.13
Figure 1: Market capitalization of USDT, USDC, BUSD, DAI14 ($BN, 1/1/20 – 6/30/22)
180
160
140
120
100
80
60
40
20
1/1/2020 6/1/2020 1/1/2021 6/1/2021 1/1/2022 6/1/2022
14
Coingecko, Stablecoins by
Market Capitalization, as of
30 June 2022. USDT BUSD USDC DAI
The trading volume of stablecoins has generally increased over time. In the
past, stablecoin on-chain trading volume, as shown below, has generally been
correlated with overall digital asset prices – stablecoins have traded in greater
volume as digital asset prices increased. This changed in Q2 2022, when the
volume of stablecoin on-chain trading increased following the collapse of UST
and an overall decline in digital asset prices (Figure 2). This arguably shows
digital asset market participants’ willingness to remain digitally native in a
market downturn, and demonstrates the use of stablecoins as a store of value
outside of the traditional financial system.
Figure 2: Quarterly stablecoin trading volume and Bitcoin prices, Q1 2018 to Q2 202215
Quarterly on-chain trading volume shown for USDT, USDC, DAI, USDP, HUSD, GUSD, BUSD in $ billions.
BTC quarterly average prices shown in $ thousands.
$2000
$1800
$1600
$1400
$1200
$1000
$800
$600
$400
$200
$0
3/18 6/18 9/18 12/18 3/19 6/19 9/19 12/19 3/20 6/20 9/20 12/20 3/21 6/21 9/21 12/21 3/22 6/22
15
The Block, Adjusted On-chain Bitcoin price averaged over a quarter
Volume of Stablecoins, as of
30 June 2022; Coinmarketcap,
Bitcoin Price, as of 30 June 2022 Quarterly stablecoin on-chain trading volume
Defining characteristics of stablecoins

Stablecoins differ from conventional payment instruments in several
ways. Although the designs differ, all stablecoins today possess each
of these characteristics to varying degrees.
Digitally native and programmable

Stablecoins run on blockchains operating like cash on digital rails.
#1 Security is enforced through private keys (complicated passwords)
and they can be programmed in smart financial contracts that are
self-executing based on predetermined conditions.
Decentralized (peer-to-peer) transactions

Stablecoins do not require a centralized third party, like a bank, to
#2 facilitate a transfer. They operate on ‘permissionless’ blockchains
that allow any two counterparties to transact according to the rules
established by the blockchain protocol.
Operationally transparent
Stablecoins transactions are fully observable on blockchains, making
#3 it possible for users and regulatory authorities to fully track their use,
measure circulation, and assess their functionality and reliability.
Pseudo-anonymous
Transactions occur between digital wallets identified by a random
#4 arrangement of characters that preserve anonymity. However, once an
address is connected to a person or entity, their full history of wallet
transactions is revealed, resulting in a loss of anonymity.
Stable value
Stablecoins are less volatile than other cryptocurrencies, such as
Bitcoin or Ether, because their value is pegged to fiat currencies.
#5 While different stablecoin arrangements can lead to different levels
of price stability, their pegged values allow them to serve as a reliable
medium of exchange.
2.1 Types of stablecoins
There are different ways that stablecoins maintain a stable value relative
to the reference currency, falling into three general categories: fiat-backed
stablecoins, crypto-backed stablecoins, and algorithmic stablecoins. These
categories are not mutually exclusive, and a stablecoin may also use a
combination of these mechanisms to maintain its value.
The core questions of stablecoin design are embodied in a problem known as

the stablecoin trilemma: a theoretically perfect stablecoin would have three
key features – price stability, capital efficiency, and decentralization – but,
16
Christian Catalini and Alonso de
Gortari, On the Economic Design
because of the tradeoffs between these features, no stablecoin can possess
of Stablecoins (5 Aug 2021). all three at once.16
• Price stability is the strength of a stablecoin’s ability to maintain its peg,

even through periods of market stress.
• Capital efficiency refers to the total amount of assets (reserves plus a

capital buffer) that a stablecoin needs to maintain its price stability; safe,
liquid assets do not need as large a buffer and are therefore more capital
efficient, as discussed below.
• Decentralization is the extent to which control of a stablecoin

arrangement is distributed among its participants, and not concentrated in
any single person or entity.
Each type of stablecoin represents a different tradeoff within the trilemma.

Fiat-backed stablecoins have price stability and capital efficiency, but
not decentralization. Crypto-backed stablecoins have price stability and
decentralization, but not capital efficiency. Algorithmic stablecoins have
decentralization and capital efficiency, but not price stability.
Figure 3: Stablecoin Trilemma

2.1.1 Fiat-backed stablecoins
A fiat-backed stablecoin is generally issued in exchange for a fiat currency

that is then used to invest in reserve assets denominated in the same currency.
By this process the original fiat currency becomes digitally native and can
travel on the blockchain. The issuer of a fiat-backed stablecoin maintains
the stablecoin’s 1:1 peg with the fiat currency by holding reserve assets of at
least equal value to the total amount of stablecoins outstanding. That is, the
reserves back an issuer’s obligation to redeem a stablecoin at its face value.
Holding reserves in excess of the total amount outstanding provides a capital
buffer for further stability. All fiat-backed stablecoins operate within custodial
arrangements, as discussed in section 2.2 below.
As of June 2022, an estimated 91.7% of the total market capitalization of

all stablecoins are fiat-backed stablecoins pegged to the U.S. dollar.17 Their
17
The Block, Stablecoins, defining characteristic is that reserve assets are held by custodians in the
as of 30 June 2022 traditional financial system, apart from any blockchain.
The fundamental factors affecting a stablecoin’s ability to maintain its peg

to a fiat currency are: (1) the composition of its reserve assets, and (2) the
size of its capital buffer. The capital buffer is necessary to protect against an
unexpected decrease in the value of the reserve assets, which typically include
cash, cash equivalents, and government bonds maturing within 90 days. But
a fiat-backed stablecoin might also be backed by other types of assets, e.g.
securities or commodities such as precious metals. The riskier and less liquid
a stablecoin’s reserve assets are, the larger the buffer needs to be to maintain
a stable peg. In this respect, the economics of stablecoin reserves can draw on
well-established principles from bank regulatory capital frameworks.
Reserve composition and buffer size are not the only determinants of
a stablecoin’s price stability. Clear, detailed disclosures verified by an
independent accountant are necessary to alleviate concerns that might
spark a run. Stablecoin arrangements also need to maintain strong risk
management practices, encompassing financial as well as operational risks.
Effective operational risk management is critical to maintaining a smoothly
functioning redemption process, which in turn is necessary for stablecoin
holders to have confidence in their ability to exchange the stablecoin for fiat
currency on demand. Stablecoin issuers must also exercise care in establishing
relationships with other institutions that perform critical functions within
the stablecoin arrangement. For example, holding cash reserves at a bank
may expose stablecoin holders to significant losses if the bank were to fail,
especially where cash reserves are commingled in a single account and subject
to a deposit insurance limit of only $250,000.
18
Circle, How to Be Stable – USDC The quality and liquidity of stablecoins’ reserve assets are particularly relevant
Transparency and Trust (13 May
2022); Binance, The Importance of during periods of market stress. In May 2022, when the Terra USD (UST)
Fiat Reserve-Backed Stablecoins
(10 May 2022); see also Coingecko,
algorithmic stablecoin collapsed, USDC and BUSD, which are backed by cash
Tether Price Chart; Coingecko, and short-term U.S. Treasuries, generally maintained their pegs.18 In contrast,
USDC Price Chart; Coingecko,
BUSD Price Chart. USDT’s reserves reportedly include some assets that are riskier and less
liquid. These features may have contributed to USDT’s deviation from its one
19
For more information on USDT reserve
assets, see Tether’s Transparency
Report. As of 31 March 2022, USDT’s dollar peg during this stress period.19 Changes in the market capitalization of
self-reported reserves included 4.52%
in corporate bonds, funds, and precious each of these stablecoins show how the quality and liquidity of a stablecoin’s
metals; 3.82% in secured loans to reserve assets can be important to their long-term resilience. USDT’s market
unaffiliated entities; and 6.02% in other
investments including digital tokens. capitalization fell from $72.58 billion to $66.41 billion from May to June 2022,20
The remaining 85.64% is invested in a
general category of assets called “Cash
whereas USDC’s market capitalization increased from $53.73 billion to $55.6
& Cash Equivalents & Other Short- billion over that same period.21
Term Deposits & Commercial Paper.”
28.47% of the assets in this category
are commercial paper and certificates
of deposit. Some of these assets
Over longer time horizons, the market prices of leading fiat-backed
entail credit risk and may contribute stablecoins have generally remained stable, with only a handful of instances
to concerns regarding the reliability
of USDT’s reserves in maintaining a where the price at which one of these stablecoins could be purchased or
stable peg. sold on an exchange deviated more than half a basis point ($0.005) below the
stablecoin’s face value.22 These deviations generally occurred due to major,
20
Coingecko, Tether Market
Capitalization Chart.
short-term increases in volatility in crypto asset markets and were quickly
eliminated. In most cases, the stablecoin’s price returned to within $0.005
Coingecko, USDC Market
21
of its face value within a few hours. As shown in the figure below, there are
Capitalization Chart.
minimal fluctuations in the price of USDT and USDC stablecoins from their
22
Coingecko, Tether Price Chart; pegs. From January 2021 to the end of May 2022, both USDT and USDC ranged
Coingecko, USDC Price Chart;
Coingecko, BUSD Price Chart. between $0.995 to $1.005 a vast majority of the time.
Figure 4: Peg deviations for USDT and USDC January 2021 – June 2022 23
Data sourced from

23
CryptoCompare, as of 30
June 2022
JPMorgan, Onyx Coin Systems,

24
The definition of fiat-backed stablecoins can also include deposit coins, which
as of 30 June 2022
are digital representations of deposits at a bank. Deposit coins are not yet a
USDF Consortium, Introducing widely adopted method of putting fiat currencies on blockchain rails but may
25
the USDF Consortium, as of 30

June 2022 emerge over time. Examples of deposit coins include JPM Coin24 and USDF.25
Deposit coins are a promising innovation, but their potential will be hard to
realize without significant changes to existing bank regulations. Banks today
must satisfy Know-Your-Customer (KYC) requirements with respect to each
depositor, which means that deposit coins cannot trade freely outside of a
bank’s perimeter on public blockchains. Regulatory authorities would also
need to determine how deposit coins should be covered by deposit insurance,
and how users’ deposit coin holdings should be aggregated in relation to
deposit insurance limits (e.g., in the United States, $250,000). The claims of
deposit coin holders should also have the same priority (i.e. rank pari passu)
as traditional bank deposits in the event that the bank fails. Each of these
issues would likely require changes to the bank regulatory framework in most
jurisdictions.
2.1.2 Crypto-backed stablecoins
A crypto-backed stablecoin is similar to a fiat-backed stablecoin in that

both sustain their pegs based on a pool of reserve assets of at least equal
value to the total amount of the stablecoins outstanding. However, a crypto-
backed stablecoin relies on digital assets whose primary purpose is not to
support the stablecoin. DAI, for example, is a crypto-backed stablecoin that
is minted in U.S. dollar denominations by posting another digital asset as
collateral. To prevent the value of DAI from dropping below its face value,
the amount minted is only a fraction of the value of the collateral posted.26
This overcollateralization serves as a buffer for any volatility in the price of
the posted collateral relative to the dollar and pledged digital asset. This is
conceptually similar to what happens when borrowers ask for a home equity
loan at a bank. Borrowers post their houses as collateral, and the bank issues
26
MakerDAO, A Guide to Dai Stats. them newly minted currency in the form of a loan.
Crypto-backed stablecoins have another key difference from fiat-backed

stablecoins in that there is no custodial arrangement. As with algorithmic
stablecoins discussed in the next section, they rely on smart contracts to
maintain their pegs. For example, the MakerDAO smart contract that governs
DAI provides for the automatic liquidation of a user’s collateral if its value
27
Id.
drops below a pre-specified threshold.27 While abrupt deviations in prices
might yield unexpected liquidations, this mechanism protects the integrity
28
MakerDAO, Liquidation,
of the peg.28 DAI’s track record demonstrates that this solution has been
as of 30 June 2022. relatively effective to date in maintaining its peg to $1.00, as does its resilience
during the May 2022 volatility period.29 The following figure shows that the
29
Data sourced from price of DAI, like USDT and USDC, generally remained within a narrow range
CryptoCompare, as of 30
June 2022 between $0.995 and $1.005 from January 2021 to the end of June 2022.
Figure 5: Peg stability and market capitalization for DAI 30
30
Id.
The primary weakness of crypto-backed stablecoins is their capital

inefficiency. While over-collateralization can be an effective way to maintain
See, e.g., On the Economic
31 a 1:1 peg, the amount of resources needed to protect against the volatility of
Design of Stablecoins, by collateral assets’ prices is substantially larger than the resources required for
Christian Catalini and Alonso
de Gortari, (August 5, 2021). traditional finance arrangements.31
2.1.3 Algorithmic stablecoins
Algorithmic stablecoins are similar to crypto-backed stablecoins in that they

both operate in non-custodial arrangements using smart contracts, but there
is a key difference. Crypto-backed stablecoins have reserve assets that exist
apart from the stablecoin arrangement, whereas algorithmic stablecoins use
another digital asset within the same arrangement to maintain their peg. That
is, the value of the digital asset backing an algorithmic stablecoin depends
on the stability of the stablecoin itself. This is commonly referred to as
endogenous backing.
An endogenously backed algorithmic stablecoin involves two tokens: a

stablecoin with an intended fixed face value, and an investment token with
a floating value. The algorithm enables each token to be converted into
the other at a ratio determined by the investment token’s market price. For
example, if the investment token has a market price of $10, and the stablecoin
has a face value of $1.00, one stablecoin can be converted into one-tenth of
an investment token. So long as the investment token has a non-zero market
value, and the aggregate value of the investment tokens is greater than the
combined face value of all minted stablecoins, the stablecoin should in theory
be able to maintain its peg.
The primary weakness of algorithmic stablecoins is that their value could

collapse if confidence wanes in the stablecoin arrangement as a whole – a
so-called “death spiral.” As seen with the Terra USD stablecoin (UST), which
was endogenously backed by LUNA tokens, it can be difficult for an algorithmic
stablecoin to maintain its peg to a fiat currency. LUNA tokens had a floating
value based on their utility in the Terra ecosystem and served as the shock
absorber for UST. When UST began to lose its peg on May 9, dropping below $1,
speculators could buy and swap the discounted UST for $1 of LUNA. In theory
this arbitrage should have driven the price of UST back to $1. In practice, the
LUNA token was unable to maintain its value and support the arbitrage. Each
UST coin burned required new LUNA tokens to be minted, and the supply of
LUNA ballooned, diluting its value. Moreover, the demand for minting new
LUNA was so strong that the network became congested, more costly, and
unable to keep up. As a result, the price of LUNA dropped on trading platforms.
The loss of confidence in UST fueled a loss in confidence in LUNA, which
fueled a loss in confidence in UST – accelerating into the death spiral of a
32
Coingecko, UST Price, last
visited 30 June 2022 stablecoin that as of May 8 had a market cap of more than $18.6 billion.32
The UST death spiral was not entirely unexpected. As described by Christian
Catalini and Alonso de Gortari in August 2021, “Death spirals are likely to occur
whenever the value of a stablecoin’s reserve is tied to the future success
of the stablecoin itself, for example through the inclusion of an investment
token as part of the reserve assets.”33 The point of no return in the UST-LUNA
death spiral was when the total market value of LUNA dropped below the
total market value of UST in circulation – meaning a full conversion could no
longer be supported. As this breaking point approached on May 9, the Luna
Foundation Guard, a reportedly nonprofit entity established to support UST’s
33
Catalini, supra at 16
peg in the event of a crisis, announced the release of Bitcoin reserves to
purchase UST and drive its price back up. But it was too late. The run on UST
could not be stopped, and by May 13 even Do Kwon, the CEO of Terraform Labs,
34
Do Kwon, Terra Ecosystem acknowledged that UST would never restore its peg.34 The collapse of UST and
Revival Plan (“While a
decentralized economy does need LUNA provides real-world evidence to support the theoretical prediction that
decentralized money, UST has lost a purely algorithmic stablecoin would struggle to maintain its peg during a
too much trust with its users to
play the role.”) market stress event.
Figure 6: Terra USD (UST) price in May 2022 35
35
Data sourced from
CryptoCompare, as of
30 June 2022
2.2 Stablecoin arrangements: custodial and non-custodial
A stablecoin arrangement is the ecosystem around a stablecoin, including

the processes, people and entities involved in using it. There are two types of
stablecoin arrangements: custodial and non-custodial. Unlike the traditional
payments system, in which banks can control the creation, redemption,
transfer, and storage of money, both types of stablecoin arrangements can
have these functions performed by different parties.
In a custodial arrangement, the reserve assets backing the stablecoin are held
in custody by the stablecoin’s issuer. The issuer bears primary responsibility
for maintaining the functioning of the stablecoin arrangement. In many cases,
the issuer may rely on third parties to fulfill this responsibility. For example,
the issuer of a fiat-backed stablecoin would maintain an account at a bank
to hold cash and other reserves, and may work with exchanges and market
makers to facilitate issuance and redemption transactions.
Non-custodial arrangements seek to operate without the need for a

stablecoin’s holders to place their trust in an issuer or other intermediary.
They do so by structuring the economic relationships among participants
in the stablecoin arrangement through blockchain protocols.
All fiat-backed stablecoins must operate within a custodial arrangement; fiat-

denominated assets exist in the traditional financial system, and therefore
require an intermediary to interface with a blockchain. A crypto-backed
stablecoin could potentially operate in a custodial arrangement, though most
of them have non-custodial arrangements. All algorithmic stablecoins operate
in non-custodial arrangements.
The following table, adapted from the Financial Stability Board’s report on
Financial Stability Board,
36 “Regulation, Supervision and Oversight of ‘Global Stablecoin’ Arrangements,”36
Regulation, Supervision and describes the functions and activities in stablecoin arrangements, both
Oversight of “Global Stablecoin”
Arrangements (13 Oct 2020) custodial and non-custodial.
Table 1: Stablecoin arrangements – functions and activities

All of the functions and activities performed by a stablecoin arrangement

have analogues in traditional payments. One important difference between
stablecoin arrangements and traditional payments is that core functions
can be disaggregated and performed by different parties in a stablecoin
arrangement.
Consider three of a stablecoin arrangement’s core functions: (1) the creation

and redemption of stablecoins, (2) transfers among users, and (3) storage
of the stablecoins. Analogous functions could all be performed by a bank in
the context of traditional payments. A bank creates and redeems a payment
instrument by accepting a deposit or permitting its withdrawal by a depositor.
The bank can make a transfer, either to another depositor at the same bank
on its own books and records, or to a depositor at a different bank through a
network of intermediaries, such as the Automated Clearing House (ACH). A
bank can also store value for a depositor in a deposit account.
In a stablecoin arrangement, by contrast, each of the same three functions can

be performed by different parties who may have no pre-existing relationship
with one another. Creation and redemption of a stablecoin would be performed
by the issuer in a custodial arrangement or by a protocol in a non-custodial
arrangement. Transfers are effected on the blockchain in both arrangements.
Storage could be provided by a custodial wallet provider or by a user herself
with a self-hosted wallet.
Maintaining the smooth functioning of our payments infrastructure is

of critical importance to the financial system and the real economy. As
stablecoins grow in importance as a means of payment, policymakers must
consider how standards to maintain the integrity of traditional payments
infrastructure should be adapted for stablecoin arrangements. Global
standard-setters have already made significant progress to provide a starting
37
BIS, CPMI-IOSCO, Application of
the Principles for Financial Market point for policymakers to implement globally coordinated standards in their
Infrastructures to stablecoin
arrangements (13 July 2022)
respective jurisdictions.37
PART 3 Stablecoin use cases

Stablecoins were born out of a need to put fiat currencies on digital rails for
the purpose of accessing the crypto ecosystem. As the ecosystem grows,
and infrastructure further develops, so will stablecoin use cases. Current use
cases include domestic and international payments, digital asset trading, and
lending and borrowing through decentralized finance (DeFi) protocols. More
use cases, such as in additional DeFi solutions and financial inclusion, are
likely to develop over time as innovations continue and stablecoins achieve
further scale and breadth of acceptance.
It is important for policymakers to

understand stablecoins’ current and
future uses when developing regulatory
frameworks.
3.1 Digital asset trading – increasing digital asset market liquidity
One of the primary uses of stablecoins is to provide an efficient and safe on-
ramp from a fiat currency into the digital ecosystem. Stablecoins allow digital
asset investors to modify their portfolios in the same way investors trade in
and out of securities listed on stock exchanges using conventional currencies
like the dollar or euro. As such, digital assets are often listed on trading
platforms as trading pairs with stablecoins.
Using stablecoins for digital asset trading is advantageous because it allows

exchanges and market participants the simplicity and efficiency of a common
medium of exchange, with assets priced in the same unit of account. It also
allows investors to retain a portion of their portfolio in a low-volatility asset
while they decide on the next investment or if they would like to temporarily
reduce their exposure to the market. Stablecoins efficiently provide this
option for digital asset investors by allowing near-instantaneous digital
asset transactions and 24/7 availability via public blockchains. The result
is an increase in market liquidity and depth for digital assets. This enables
digital asset markets to provide more stability and reliability for participants
to buy and sell easily, better protection for investors when trading, and
IMARC Group, Cryptocurrency
38
Market: Global Industry Trends,

higher barriers to any potential price manipulation. The expected increase in
Share, Size, Growth, Opportunity digital asset trading volumes over time will likely fuel continued demand for
and Forecast 2022-2027 February
2022. stablecoins in this use case.38
Figure 7: Share of Centralized Exchange trading volume: USDC, USDT, BUSD, DAI 39
%, 30 day moving average, 1/1/2018 – 6/30/2022
Data sourced from

39
CryptoCompare, as of
30 June 2022
3.2 Payments – faster, cheaper money transfer
The stablecoin infrastructure developed for market trading can also serve
as a medium of exchange between individuals and entities, including for
cross-borders transfers, which today can be prohibitively expensive using
conventional methods. The following figure shows trends in the global cost of
sending $200 in remittances since 2011:
Figure 8: Trends in the global cost of sending $200 in remittances40
40
BIS, The journey so far: making
cross-border remittances work
for financial inclusion (15 June
2022)
As one example, Coinbase supports cross-border transfers of digital assets on

our platform, including stablecoins such as USDC. Recipients of transfers from
41
Coinbase Blog, There’s now
a cheaper, easier way for your the U.S. to Mexico are able to save or cash out the money received in Mexican
friends and family in Mexico to pesos at more than 37,000 physical retail outlets and convenience stores
cash out the crypto you send
them (15 Feb 2022) across Mexico.41
Stablecoins are also increasingly being used and accepted as means of

payment by businesses. For example, since USDC operator Circle’s launch of
Circle Accounts for business clients to deposit, withdraw, receive, and store
42
Circle Blog, USDC Market Cap digital assets and settle all payments in USDC, the number of active Circle
Grows to More than $50 Billion,
(February 2022) Account customers increased by 213% from 2020 to the end of 2021.42 Coinbase
Commerce currently has 8,000+ merchants signed up to accept digital assets
43
Coinbase, Commerce,
including USDC and DAI from their customers globally, in addition to accessing
(March 2022) a set of business tools to manage such business transactions.43
There is strong appeal to using stablecoins over conventional payments

methods. Because stablecoin payments can be conducted on a public
blockchain that enables peer-to-peer transfers, users can settle transactions
near-instantaneously without an intermediary bank or financial institution to
facilitate settlement. Stablecoin transfers can also be sent off-chain through
44
Coinbase, Coinbase pricing and a trusted intermediary. For example, Coinbase offers USD Wallet and Hosted
fees disclosures, as of June 2022.
Note that the above description Cryptocurrency Wallet services free of charge, and does not charge for
doesn’t refer to Coinbase Wallet, transferring digital assets, including stablecoins, from one Coinbase user’s
a separate, self-hosted wallet
product. wallet to another.44
These options give stablecoin users alternatives to incumbent payment

systems that can be slow and more costly, particularly for cross border
transfers. For example, current payment and remittance platforms require
multiple intermediaries to execute a transaction, often resulting in longer
transaction/settlement times and additional fees, such as foreign transaction
fees. Stablecoin transfers can be settled in under 30 minutes whereas
international transfers can take multiple business days. According to PYMNTS’
August 2021 Global B2B Payments Playbook, the average U.S. firm now waits
33 days to receive a cross-border payment, a lag that can significantly stress
45
PYMNTS.com, Average US Firm cash flow and cause downstream effects.45 High costs and lengthy delays
Waits 33 Days to Receive Cross-
Border Payments, Data Show,
represent significant disadvantages for conducting payments transfers in
September 16, 2021. traditional markets today.
The flexibility and low cost of stablecoin payment methods could also
benefit consumers and businesses by increasing the competitive pressure on
incumbent systems. Credit card processing fees, for example, typically range
from 1.5% to 3.5% of the value of each transaction, with the vast majority of
transactions processed on one of only four large networks.46 The availability
of stablecoins as an alternative could reduce the costs for merchants to
receive payment for goods and services – not only could merchants choose
to accept stablecoins directly, credit card companies may reduce their fees
to incentivize merchants to remain on their networks. Increasing competition
Forbes, Credit Card Processing
46 could similarly reduce costs to consumers for wire transfers and other
Fees (2022 Guide) (14 July 2022) traditional payments.
While stablecoins can reduce the cost and delay in transmitting payments,
there remains a criticism that on-chain transactions can still be subject to high
gas fees. Gas fees are payments required from users for their transactions
to be validated and processed on a blockchain. The cost of gas fees to record
transactions on some blockchains can be large on a percentage basis for a
small dollar transaction. This can be particularly true for popular and
frequently congested networks like Ethereum. However, as with any emerging

technology, the costs are likely to decrease over time as users migrate to
using new blockchain solutions. In the long term, given that payments on
blockchains allow for an automated transaction verification process, unlike
the more costly manual verification process many banks use today, stablecoin
payment methods are likely to be a competitive alternative.
3.3 Broadening access to financial services – financial inclusion
47
a16z, State of Crypto A remarkably large number of people around the world remain unbanked
(17 May 2022)
or underbanked. Globally, 1.7 billion people do not have access to a bank
48
Board of Governors of the account.47 In the United States, 5% of adults are unbanked and 13% are
Federal Reserve System, Report underbanked.48 In a survey conducted by the FDIC, commonly cited reasons
on the Economic Well-Being of
U.S. Households in 2020, (May for not having a bank account included not having enough money to meet
2021)
minimum balance requirements, distrust of banks, and fees being too high
49
FDIC, How America Banks: or unpredictable.49 Many of these challenges were exacerbated during the
Household Use of Banking and COVID-19 pandemic, which highlighted the need for contactless and digital
Financial Services, 2019 FDIC
Survey (October 2020) payments systems.
Stablecoins have the potential to overcome some of these barriers by making

the global payments system faster and more efficient, and reducing the overall
cost of financial services. All that is required is a smart phone or computer
access to the internet, which includes many of the currently unbanked
50
a16z, State of Crypto
population. For example, among this population of 1.7 billion, 1 billion have
(17 May 2022) access to a mobile phone and 480 million have access to the internet.50
3.4 Next-generation applications – growing diversity of DeFi,

tokenization, and web3
The next generation internet,

dubbed “web3,” seeks to give users more
control over their information, data, and
digital footprint relative to the current
walled-garden approach of web2.
In this decentralized approach to the internet, digital tokens will become the
unit of the economic exchange for the services that fuel disintermediation.
In web3, the value of a digital platform would be shared with its users, rather
than captured entirely by its corporate creator, through tokens that provide
both functionality on the platform and benefits from its success. We expect
stablecoins to play an important role as the fiat onramp into this digital
ecosystem, even as central bank digital currencies are being contemplated by

many jurisdictions.
Today’s DeFi protocols provide a glimpse of this future, with new protocols
Statista, TVL across DeFi constantly being developed that present innovative ways to address new
51
blockchains from November 2018

to June 26, 2022 market needs.51 These innovations include:
• digital asset trading
• insurance solutions
• automatic payments
e.g., rent, salaries, subscriptions, etc.
• prediction markets
• saving, lending, and borrowing
DeFi protocols that allow potential borrowers and lenders, or buyers and
sellers, to find each other nearly instantly offer a tremendous opportunity
to improve economic efficiency around the world. They have several key
advantages over traditional finance. The lending protocols are autonomous
and permissionless, enabling lending directly between participants without
the need for any third-party involvement or any minimum funds. Eliminating
the need for intermediaries can lead to lower barriers to entry, a more
streamlined lending process, and better borrowing speeds compared to
traditional lending.
PART 4 Policy considerations

Although no jurisdiction has yet adopted a comprehensive regulatory
framework for stablecoins, many have issued reports and proposals, and
further development is progressing quickly. There are a number of key
considerations that we believe should inform policy development in the
near term.
4.1 Financial stability and run risk
There is general concern among policymakers that a failure or distress of a

stablecoin or stablecoin arrangement could adversely affect the stability of
the financial system. For example, a sudden loss of confidence in a fiat-backed
stablecoin could lead its holders to seek redemptions en masse, which in turn
could force the stablecoin’s issuer to liquidate reserve assets in a fire sale. The
fear is that such an event could cause a sharp decrease in the market price of
the reserve assets below their intrinsic value, with spillover effects on other
market participants.
Different fiat-backed stablecoins present different run risks. The following

figure provides a breakdown of the reserve assets backing the three largest
fiat-backed stablecoins: USDT, USDC, and BUSD:
Figure 9: USDT, USDC, and BUSD reserve assets52
52
Tether, Transparency, last
viewed 30 June 2022, based on
data from Tether’s Independent
Accountant’s Report as of 31
March 2022; Circle, USDC Reserve
Assets as of 30 June 2022; Paxos,
BUSD Reserve Assets as of 30
June 2022.
For example, Tether has not disclosed which companies’ commercial paper it
53
Id. owns, making it impossible to assess asset-specific credit risk.53 Consistent
with these shortcomings, the CFTC and New York’s attorney general both fined
54
CFTC, CFTC Orders Tether and Tether for fraudulently misrepresenting its reserves.54 Tether has announced
Bitfinex to Pay Fines Totaling its intention to shift a substantial portion of its reserves from commercial
$42.5 Million (15 Oct 2021); New
York Attorney General, Attorney paper into U.S. Treasuries, which if done should substantially reduce incentives
General James Ends Virtual
Currency Trading Platform for a run.55
Bitfinex’s Illegal Activities in New
York (23 Feb. 2021)
In contrast, the run risk for USDC and BUSD is lower because, among other
things, their reserves are more transparent. Independent certified public
Tether, Tether Continues to
55 accountants attest monthly to the amount of USDC’s reserves.56 BUSD’s
Reduce Commercial Paper issuer, Paxos Trust, is a regulated trust company in New York. Paxos recently
Holdings As It Solidifies Its
Position As The Most Transparent published an unaudited list of the stablecoin’s reserve assets.57
Stablecoin (1 July 2022)
As the market capitalization of stablecoin issuances grows, continued

mitigation of financial stability concerns will depend not only on the quality
56
Centre, USDC Transparency, last of reserve assets, but also on the level of public transparency of reserves
viewed 30 June 2022
and the safeguards established to prevent a run. Regulatory frameworks
should establish standards to engender confidence among stablecoin holders
that the stablecoin can maintain its value, and thereby remove incentives
Paxos Binance USD (BUSD),
to redeem, even during periods of financial market stress. Our policy
57
Unaudited Holdings for June 30,

2022 at 5pm EST recommendations for these regulatory frameworks are set out in section 5.
Lastly, the growing use of DeFi is sometimes cited as a potential risk to the
traditional lending sector or to financial stability. DeFi collateralized lending
protocols currently do not provide conventional credit intermediation. In place
of assessing a borrower’s creditworthiness, they rely on overcollateralization
and automatic liquidation mechanisms to make loans, which are limited by the
amount of collateral that a borrower posts. Potential risks to financial stability
could materialize if a decrease in the value of collateral assets were to trigger
mass liquidations, leading to further selling and even sharper decreases in
their value.
The total value locked (TVL) in DeFi protocols was $73 billion as of June 30,
2022, far below the high of over $229 billion reached in March 2022.58 This
level of TVL is not in the realm of a financial stability concern. A cascade of
selling triggered by automatic liquidations was in fact observed in May 2022,
58
DeFi Llama, defillama.com, as of yet the DeFi collateralized lending protocols themselves generally continued
30 June 2022 operating throughout this period.
More generally, because DeFi protocols are over-collateralized, and not

dependent on the creditworthiness of borrowers or the cash flow-generating
capacity of the collateral pledged, they do not engender the same concerns as
credit intermediation in the traditional system. However, to the extent these
protocols are procyclical, they could increase the price volatility of the assets
accepted as collateral. These risks should be monitored as DeFi grows, but
they can be managed effectively using existing tools, as many DeFi protocols
have demonstrated.
4.2 Operational resilience
Stablecoins are still in the process of gaining trust from mainstream users, and
to do so they need to continue establishing a strong foundation of operational
resilience and technological reliability. That means delivering good service
consistently over time without disruptions.
Fiat-backed stablecoin arrangements, because they custody reserve assets

at a centralized financial institution, face many of the same operational risks
as with traditional payments systems. For example, to process issuance and
redemption transactions, information from the blockchain must be sent
off-chain to a custodian; these communications between the issuer and the
custodian should be protected by high standards of information security. The
issuer should follow best practices in vetting the custodian and any other
entities performing important functions within the stablecoin arrangement.
And, as for any process controlled by human beings on a day-to-day basis,
certain types of operational risk – physical security risk, the risk of fraud or
malfeasance, and basic fat-finger error risk – cannot be eliminated but can be
managed effectively.
The blockchains themselves also present novel forms of operational risk.

While blockchains have no single point of failure and can be more resilient
than centralized payment systems in some respects, they introduce new risks
related to programming errors and software bugs. Moreover, blockchains
vary widely in terms of their security guarantees, resilience against malicious
attacks, and extent of decentralization – on some blockchains, a centralized
developer team maintains a high level of control, whereas others rely on
agreement among a disparate set of validators.
Other potential risks could arise from the security arrangements associated
with any super-users of a stablecoin smart contract – for example, if a small
number of core developers are empowered to push through updates to the
smart contract code in an emergency, strong safeguards must be in place to
prevent malicious use of these special powers. Best practices for development
should apply not only to the blockchain itself but at the level of stablecoin
smart contracts too.
A stablecoin is only as good as the blockchain on which it runs, or if a

stablecoin runs on many blockchains, as good as the weakest one. Operational
problems could disrupt stablecoin holders’ access or even cause them to
lose their money. Before a stablecoin is deployed, a blockchain should reach a
See generally Neha Narula,
59
sufficient level of maturity in accordance with best practices for development,
The Technology Underlying
Stablecoins (23 Sept 2021) including testing, detecting bugs, and deploying fixes.59
The importance of these technical issues will grow as the total amount of
stablecoins increases over time. To reach sound, well-informed decisions
on stablecoins, financial regulatory policymakers will need to develop
greater fluency in these areas of technical expertise and integrate them into
policymaking processes.
4.3 Preventing financial crimes
Stablecoins, like any financial asset, could potentially be used in financial

crimes, such as money laundering, financing of terrorism, or sanctions
evasion. Although crypto assets have certain features, such as speed and
purported anonymity, that may appear to be beneficial to illicit actors, only
a small percentage of crypto transactions are related to criminal activity.60
60
Elliptic, Financial Crime Indeed, bad actors incur significant risk when using crypto assets because
Typologies in Cryptoassets at most transactions are recorded on a public searchable database – providing
5 (2020) (“illicit activity today
still accounts for less than 1% of significant new methods of tackling financial crimes.61
all transactions”); CipherTrace,
Cryptocurrency Crime and
Anti-Money Laundering Report A key difference between traditional financial transactions and those
at 9 (2021) (“illicit transactions
mak[e] up less than 0.5% of involving digital assets is that blockchain technology makes it easier to trace
Bitcoin’s yearly volume in 2020”);
Chainalysis, The 2021 Crypto
how and where digital assets are being moved. Public blockchains offer
Crime Report at 5 (“In 2020, the law enforcement unprecedented visibility into the details of transactions,
illicit share of all cryptocurrency
activity fell to just 0.34%[.]”). including the date, time, amount, and addresses involved in a transaction,
without having to issue requests for information or subpoenas to market
participants. The public, traceable, and permanent nature of blockchains have
61
Neal B. Christiansen and enabled law enforcement to achieve high-profile successes.62
Julia E. Jarrett, Forfeiting
Cryptocurrency: Decrypting
the Challenges of a Modern
Asset, 67(3) Department of
Questions about the role crypto assets could potentially play in illicit finance
Justice Journal of Federal Law have come to the fore with Russia’s invasion of Ukraine. Even with intensified
and Practice 155, 166 (Sept.
2019) (“Cryptocurrency, despite scrutiny of digital assets, including stablecoins, from the perspectives of
the purported anonymity it national security and foreign policy, there is little to no evidence that crypto
grants criminals, provides law
enforcement with an exceptional assets have played a role in helping Russians avoid U.S. and global sanctions.63
tracing tool: the blockchain.”).
For example, U.S. Treasury Under Secretary for Domestic Finance Nellie
Liang referred to the potential illicit use of cryptocurrency in this context by
stating that “People are very aware of it, and paying attention to it . . . While it’s
Wired, The DOJ’s $3.6B Bitcoin
62 growing because the use of crypto is growing, its share as a medium for illicit
Seizure Shows How Hard It Is to finance is not anywhere as large as just using cash.”64
Launder Crypto (9 Feb 2022)
So, while some speculate that stablecoins could spur illicit activity, the
evidence suggests this is not the case. As with most illicit finance risks, it
Bloomberg, Crypto Experts
63
Say No Evidence of Major Russia appears the best defense against misuse of stablecoins is to ensure that
Sanctions Dodging (17 March regulated financial institutions handling these assets maintain effective
2022)
anti-money laundering programs, including implementing Know Your
Customer procedures, monitoring transactions, and filing suspicious activity
64
Reuters, U.S. Treasury official reports. Regulation of stablecoins should avoid pushing their development
sees modest uptick in crypto illicit and operations to jurisdictions where financial institutions are less likely to
finance, but transactions small (18
March 2022) maintain robust anti-money laundering controls.
4.4 Consumer protection and market integrity
An appropriate regulatory framework of consumer protection for the issuance

and use of stablecoins is still developing and merits careful attention to
provide consumers with reliable protections as well as meaningful access to
developing financial products. Key policy considerations include:
• Stablecoin holders should be protected from the risk of losses due to

fraud, misconduct, negligence, or the operational failure of a stablecoin
arrangement.
• Consumers should have the right to control the storage and use of any
personally identifiable information (e.g., information stored off-chain at a
service provider that could be used to connect their identities to on-chain
wallet addresses).
• Consumers should have access to clear information about the risks and
benefits of stablecoins, including their reserve assets, key technological
features, and redemption rights.
• In the event that a fiat-backed stablecoin issuer enters into insolvency

proceedings, stablecoin holders should have priority over other creditors
of the issuer, either through a more senior claim on the issuer itself or a
direct interest in the stablecoin’s reserve assets.
In addition to robust protections for consumers’ rights, stablecoins also need

to operate in a fair and orderly market. Stablecoin issuers, market makers,
and service providers should have measures in place to detect and prevent
manipulative activity, such as trading activity designed to create false or
misleading signals as to the supply, demand, or price of a digital asset.
4.5 Monetary policy
Central banks around the world are considering the potential impact that
stablecoins could have on monetary policy and the provision of credit to the
real economy. As with any financial market innovation that reaches a large
scale through mass adoption, stablecoins could one day present certain risks
to the formulation and operation of central banks’ monetary policies. The
prevalence of stablecoins might affect the speed of currency circulation,
the effectiveness of different monetary policy transmission mechanisms,
and foreign exchange price movements due to issuance and redemption of
stablecoins. The same has also been true of the big-picture, historical shifts
in the United States from bank lending to capital market borrowing, and the
similar shift since the global financial crisis from bank to non-bank financial
activity. Stablecoins are only one item in a long list of shifts in finance that
affect monetary policy.
As explained in a Federal Reserve staff paper,65 the potential impact of

stablecoins on credit intermediation depends on two things: (1) the sources
of inflows into stablecoins – e.g., cash, bank deposits, and cash-equivalent
securities like money market funds – and (2) the composition of the stablecoin
reserves in which the inflows are invested. For example, if funds are withdrawn
from a bank savings account to purchase a fiat-backed stablecoin investing in
65
John Carmichael and Gordon government securities, the provision of credit is correspondingly shifted from
Liao, Stablecoins: Growth
Potential and Impact on Banking
commercial bank lending to government funding. If done on a wide scale, this
(January 2022) could tilt the cost of capital in favor of public versus private financing.
The reverse would be true if, for example, funds were redeemed from a money
66
New forms of digital money,
Bank of England discussion paper market account invested in government securities to purchase a bank-issued
(7 June 2021) deposit coin.66
The potential impact on credit intermediation therefore depends on the

permitted types of stablecoins within a jurisdiction. The most significant
potential impact on the provision of credit by banks relates to whether a
narrow banking framework is permitted, in which a bank issues stablecoins
backed directly by central bank reserves. The relative safety of such an
arrangement could result in a migration away from commercial bank deposits
that are classically used to underwrite (riskier) loan portfolios.
Because there is not yet widespread adoption of stablecoins these potential

effects are uncertain. But the predictions are not dire. For example, the Bank of
England predicted that the overall impact on lending rates and credit provision
to the real economy would be modest, as any increase in non-bank lending
largely compensates for a reduction in credit provision by banks.67 Banks can
always increase the interest rate they pay on deposits to incentivize more
deposits to remain with them if volumes are decreasing more than they
67
Id. would like.
Stablecoins even have the potential to enhance the transmission of monetary

policy. According to the Bank of England, “New forms of digital money would
be more likely to enhance the transmission of monetary policy to lending rates
if they were interest-bearing and passed through interest rates with greater
68
Id.
speed or extent than commercial banks, prompting banks to respond.” 68
Stablecoins could also increase the velocity of money, i.e., the number of
times that a unit of currency is used to purchase goods or services within a
given period of time.69 Inefficiencies in the existing payment system often
Caitlin Long, Ten Stablecoin
69 leave money trapped – consider, for example, the amount of time between
Predictions and Their Monetary depositing a check and the funds becoming available in the depositor’s
Policy Implications (Cato Journal,
Spring/Summer 2021). checking account.
Stablecoins could unlock a significant

amount of capital by making the payments
system more efficient and reducing the
amount of time to settlement finality for
many consumer transactions.
Stablecoins present a more varied and complex set of monetary policy

implications in jurisdictions with weaker or less stable fiat currencies. While
consumers may find it advantageous to use foreign denominated stablecoins
in lieu of a volatile local fiat currency, the local central bank may as a result
find it more difficult to implement monetary policy. Global equity should
remain an important consideration in the policy discussion of stablecoins
going forward. For example, stablecoins today are commonly U.S. dollar
backed, and their use in jurisdictions outside the United States could have
the effect of dollarizing those economies. In contrast, for countries where
a stablecoins is pegged to the local currency, use of those stablecoins by
individuals in other jurisdictions could strengthen the currency. For example,
increasing circulation of U.S. dollar backed stablecoins outside the United
States could strengthen the U.S. dollar.
4.6 Concentration of economic power
Regulatory authorities have expressed concern about potential risks of

scale associated with stablecoin arrangements. For example, the President’s
Working Group on Financial Markets cited concern that a stablecoin issuer
or wallet provider being tied to a commercial firm could lead to an excessive
70
President’s Working Group on concentration of economic power.70 Additionally, if a particular stablecoin
Financial Markets, Report on
Stablecoins (1 Nov 2021) becomes widely adopted as a means of payment, there could be anti-
competitive effects if users of that stablecoin face undue frictions or costs in
71
Id. the event they choose to switch to other payment products or services.71
72
The Block, Stablecoins, In the near term, these risks are still highly attenuated, given the total amount
as of 30 June 2022.
of stablecoins currently in circulation is less than $145 billion.72 By comparison,
at the end of 2021, the largest bank in the United States had assets of $3.7
73
FFIEC, Large Holding
Companies, as of 31 March 2022.
trillion,73 the largest six banks together had assets of $13.8 trillion,74 and the
GDP of the United States was $23 trillion.75 Moreover, the interoperability of
74
Id. stablecoins across different blockchains, the ability to quickly and efficiently
convert between stablecoins on centralized exchange platforms, and the
broad decentralization of digital asset marketplaces are significant mitigants
75
St. Louis Fed, Gross Domestic
Product, as of 30 June 2022. against potential anti-competitive effects.
Longer term, because the use and circulation of stablecoins can be measured
with precision on public blockchains, regulators will be in a strong position to
monitor for concentrations of economic power and anti-competitive behavior
as stablecoins grow in volume and usage. Importantly, regulators will not need
to rely on the accuracy and completeness of private entity reporting to collect
this information, and neither will any other market participant. Any concerns
that may arise regarding the concentration and use of stablecoins would be in
full public view, enabling an unfettered analysis and discussion of the public
interest.
4.7 Commercial law clarity and certainty
Stablecoin users need to have legal clarity and certainty about the risks
to which they are exposed for stablecoins to function well as a means of
76
Jess Cheng, How to Build a payment. Jess Cheng provides a thorough exposition of the commercial law
Stablecoin: Certainty, Finality, and issues that stablecoins raise in her 2020 paper, “How to Build a Stablecoin:
Stability Through Commercial
Law Principles (24 Sept. 2020) Certainty, Finality, and Stability Through Commercial Law Principles.”76
Stablecoins do not cleanly fit into existing categories under commercial law,
which treats currencies and payment instruments differently from investment
securities and commodities. Stablecoin arrangements can be complex,
involving not only stablecoin issuers and holders but a range of other parties,
including validators, custodians, market makers, exchanges, and others.
Stablecoin issuers thus need to overcome significant hurdles to provide legal
clarity and certainty to other participants in a stablecoin arrangement using
the existing mechanisms of contract, property, and commercial law. Key
questions include:
• What is the nature of the commitment made by a stablecoin’s issuer to its

holders?
• What relationship does the stablecoin have to its underlying assets?
• What are the stablecoin issuer’s obligations with respect to the

safekeeping and possession of reserve assets?
• What are the stablecoin’s terms of redemption?
• What does it mean for a stablecoin transaction to achieve settlement

finality?
• At what point is the underlying obligation discharged in a stablecoin

transaction?
• What rules should govern adverse claims, e.g., in instances of fraud or

theft?
Providing clarity and certainty on these legal issues will require significant
work on the part of stablecoin issuers, and potentially changes to existing
commercial law. Policymakers should bear these considerations in mind as
regulatory frameworks for stablecoins are developed.
PART 5 Policy recommendations

As jurisdictions deliberate over the appropriate regulatory frameworks for
stablecoins, we believe there are certain objectives that policymakers have
in common: protecting consumers, preventing financial crimes, safeguarding
financial stability, and promoting responsible innovation. A well-designed
approach to regulating stablecoin arrangements can achieve all of these
objectives, providing consumers with fairer and more efficient financial
services that are more responsive to their needs. Below we offer views on
how to answer common questions faced by policymakers.
5.1 Which entities should be permitted to issue fiat-backed stablecoins?
Three models for the issuance of fiat-backed stablecoins are frequently

considered in policy discussions:
Model 1: stablecoins limited to deposit coins issued by insured depository

institutions. In this model, all fiat-backed stablecoins would be deposit coins,
issued by the subset of banks that are insured depository institutions (“IDIs”).
Each stablecoin would be a deposit liability on the balance sheet of the issuing
IDI. In the United States, this model is consistent with the recommendations in
the President’s Working Group’s report on stablecoins.77 Under this approach,
IDIs would manage stablecoins in essentially the same manner as deposits,
i.e., as liabilities that are redeemable for fiat currency on a 1:1 basis at any time.
77
President’s Working Group on IDIs would remain subject to existing capital and liquidity requirements, and
Financial Markets, Report on
Stablecoins (1 Nov 2021) stablecoin holders’ balances would be eligible for deposit insurance coverage.
Model 2: limited to fully reserved stablecoins issued by any bank. Less

restrictive than the first model, this model would permit any bank to
issue fiat-backed stablecoins, including trust banks and other kinds of
depository institutions whose deposits are uninsured. Rather than backing
stablecoins with deposit liabilities, issuers could back their stablecoins with
corresponding reserve assets in a segregated account or separate fund, apart
from the rest of their business. The stablecoins would still be redeemable 1:1
for fiat currency at any time, and in a similar manner as conventional money
market funds. Under this approach, assurance of the stablecoins’ value would
not come from government-backed deposit insurance, but from the quality of
the segregated reserve assets.
Model 3: limited to fully reserved stablecoins issued by any supervised

and regulated entity. Any entity would be permitted to issue fiat-backed
stablecoins, provided that it satisfies rigorous regulatory requirements and
remains subject to supervision. The regulatory requirements would address
the composition and quality of reserves, disclosures and audits, financial and
operational resilience, consumer protection, and other key areas.
While proposed frameworks that follow bank models would leverage existing
regulatory frameworks and bring comfort to prudential regulators that are
familiar with the benefits and drawbacks of bank supervision, these models
could severely restrict the adoption and use of stablecoins generally. Model
1 in particular would encumber the issuance of stablecoins with bank capital
requirements that are designed for different purposes and to address different
risks. Model 2 could enable banks to issue stablecoins without the complexity
of these requirements, but it has other drawbacks. Banks may have little
economic incentive to undertake this business model if it cannibalizes existing
profit centers by competing with traditional bank deposits, particularly if they
do not face competitive pressure from other types of stablecoins.
In our view, Model 3 strikes the appropriate balance between economic

viability, consumer protection, responsible innovation, and financial stability.
While the bank models should be permitted, they should not be the only
models permitted. Neither has yet been implemented in significant volume
or demonstrated economic viability, and restricting frameworks to only
these models presents undue risk to safe and efficient innovation in digital
marketplaces. Nonbanks can be subject to appropriate bank-like supervision
and regulation to protect consumers and financial stability.
Fiat-backed stablecoins issued by non-banks

have already gained traction and would
benefit from high standards of regulation
and supervision.
5.2 What requirements should apply to fiat-backed stablecoin arrangements?
The previous section stated our view that issuance of fiat-backed stablecoin
should be permissible by any entity that meets high standards. This section
states our views on what those standards should be. In many cases, these
standards are more stringent than existing standards.
• Reserve assets. Permissible reserve assets for a fiat-backed stablecoin

should be highly liquid and low risk: cash and cash equivalents, including
short-duration U.S. Treasuries. Beyond these categories, further classes of
reserve assets should be subject to appropriate capital buffers – above the
aggregate amount of stablecoins outstanding – to account for potential
credit risk losses and assure a stablecoin’s redeemability at face value.
These capital buffers would be particularly relevant during periods of
market stress.
• Transparency and audits. Transparency is necessary for stablecoin

holders to have the information necessary to make informed decisions,
and independent verification is necessary for their disclosures to be
worthy of stablecoin holders’ trust. Effective transparency requirements
for fiat-backed stablecoin issuers should include both monthly and
annual disclosures. Monthly disclosures should include attestations by
an independent accountant as to the composition and quality of reserve
assets and whether they are at least equal in value to the aggregate
face value of the stablecoins outstanding. Annual disclosures based on
an independent audit should be more detailed, including information
about the stablecoin’s key technological characteristics, holders’ ability
to redeem, and the effectiveness of the issuer’s internal controls, risk
management and compliance.
• Operational resilience and compliance. Fiat-backed stablecoin issuers

should be subject to high standards that cover a wide range of areas that
could affect stablecoin holders. These would include cybersecurity and
privacy safeguards to prevent hacks and protect stablecoins holders’
personal information, operational risk and business continuity measures
to sustain uptime, and a compliance program to prevent financial crimes.
In most cases, these standards can be developed based on the existing
standards that apply to banks today, tailored in an appropriate manner
to reflect the differences in stablecoin issuers’ business model and risk
profile.
• Government oversight. A federal or a state regulator should periodically

examine issuers’ compliance with applicable regulatory requirements.
Knowledge that the issuer of a stablecoin is subject to this kind of
oversight will give the public additional confidence in issuers’ financial
and operational resilience.
5.3 What role should algorithmic stablecoins have in the marketplace?
78
Barron’s, U.S. Senator Sees The recent failure of TerraUSD has led many to call for bans on algorithmic
Potential for Fraud in Terra stablecoins. Media reports told stories about investors whose life savings were
Stablecoin Collapse (23 May
2022); Al Jazeera, South lost, and many crypto pundits now claim that algorithmic stablecoins are not
Korean prosecutors raid crypto
exchanges amid Luna probe (21
suitable for retail consumers and other users of crypto products. Indeed, some
July 2022) are even questioning whether TerraUSD was a fraud.78
While time and investigation will make more clear why and how TerraUSD
failed, it is important to note that its failure did not come as a surprise to
many. As discussed earlier, academics explained how its endogenous support
arrangements were inherently unstable and might not be able to absorb
market shock or selling pressure. The May 2022 death spiral of UST has made
this fragility more broadly understood, providing valuable empirical evidence
that can inform future innovations.
It is now broadly understood that algorithmic stablecoins are not really

stable, and it is a misnomer to call them as such. Their value is not backed
by exogenous reserves, but based on a tautology – that one token can be
converted into another, and vice versa, at a ratio determined by code.
But this does not mean algorithmic stablecoins should be banned. Markets are
better than governments at picking winners and losers. Innovation requires
running experiments, and not all will succeed. Blockchain technology is
moving the internet into its next phase, and we should not be surprised if we
see shades of the dot.com era of the late 1990s. With hindsight it is always easy
to understand and identify failures, and many of the dot.com-era investments
look foolish today. But many of the successes were similarly accused of futility
in their early stages.
In assessing the future regulatory framework, policymakers should avoid

draconian and harmful measures like bans, and instead focus on the
key principles that underpin today’s successful markets. Crypto-backed
stablecoins with exogenous collateral are likely to survive over the long-term.
Allowing markets to experiment will help refine optimal designs. In doing
so, protecting consumers through clear disclosures of the attendant risks is
critical. Regulatory frameworks that focus on transparency as a central tenet,
with robust provisions that protect against fraud and misconduct, will best
allow stablecoins to continue to develop and prove themselves while letting
market forces play out.
5.4 What rights should you have as a stablecoin holder?
Anyone who holds a fiat-backed stablecoin should know that their money is
safe, without any need for due diligence or worry. That means being able to
see quickly that their stablecoins are subject to a rigorous level of regulation
and supervision and therefore can be trusted. As discussed above, regulatory
requirements should cover the composition and quality of reserve assets,
transparency and audits of the issuer’s disclosures, and the issuer’s ability to
maintain strong operational resilience and compliance programs.
Consumers should also be confident in their ability to use fiat-backed

stablecoins as money. From a legal perspective, there are two key issues:
settlement finality and insolvency treatment. First, the law should treat
stablecoins just like any other form of money and provide certainty that
when a stablecoin transaction settles on a blockchain a corresponding legal
obligation can also be discharged as nearly as possible at the same moment
in time.
Second, should an issuer become insolvent, the law should make sure that
holders suffer no losses and are able to keep using their money with minimal
interruption. In an insolvency proceeding, stablecoin holders should be first

in line to receive any value from the stablecoin’s reserve assets. This can be
accomplished by making the stablecoin holders’ claims senior to those of
other creditors, or by treating stablecoin holders as having a pro rata interest
in the reserve assets directly. Either way, stablecoin holders’ claims should be
satisfied as quickly as practicable, potentially in an administrative proceeding
akin to the bank resolution process, if proceedings under the normal
bankruptcy regime would not move quickly enough. To the extent that changes
to commercial laws or banking laws are needed to facilitate these outcomes,
the time for those changes has come.
For crypto-backed and algorithmic stablecoins, there is currently significant

skepticism about their long term viability and appropriateness for consumers.
The UST-LUNA failure in particular has led many policy makers to advocate for
bans. However, a draconian measure like this can lead to suboptimal outcomes
by limiting future innovation in an area that is still developing. Moreover, there
are significant practical limitations of imposing a ban on activities that take
place through DeFi protocols.
For these types of stablecoins, a better path would be to focus on facilitating

disclosures that promote consumer protection. These products should
be clearly differentiated from fiat-backed stablecoins that are subject to
regulation and supervision as described above. The disclosures should be
clear and conspicuous, free of misrepresentations, and otherwise subject
to antifraud provisions. Under these conditions, there is value in permitting
crypto-backed and algorithmic stablecoins to move forward with responsible
innovation.
5.5 How should stablecoins interact with other forms of money?
Maintaining interoperability across stablecoin networks, and between

stablecoins and other forms of money, will be crucial for stablecoins to realize
their full potential benefits.
Observing the growing usage of private sector digital currencies, many

countries are launching, or exploring the possibility of launching, a retail
Central Bank Digital Currency (“CBDC”). Globally, over 100 countries, with
over 90% of global GDP, are exploring a CBDC today.79 While there are many
different possible designs depending on the situational context of each
country, a CBDC would represent a digital currency issued and backed by a
country’s central bank, which would enable the public to safely make
79
Atlantic Council March 2022 digital payments.
While some predict that CBDCs will render stablecoins obsolete, we strongly
believe CBDCs will complement and encourage robust, inclusive, and safe
innovation for stablecoins and the broader digital asset economy.
Stablecoins can meaningfully complement

a CBDC in providing optimal support for
consumers and businesses.
Well-regulated, privately issued stablecoins would complement CBDCs in
several ways:
• Programmability and tailored services for different customer segments:

CBDCs will necessarily be designed to serve the mass market, while
stablecoins can be tailored to serve the specific needs of various user
segments. Although CBDCs may be designed to allow some level of
programmability, there may be constraints on how far and effectively
CBDCs can go in this direction as a by-product of other policy constraints
and objectives. The greater flexibility and innovative potential of
stablecoins can compensate for any such constraints on a CBDC.
• Potential constraints on CBDCs that stablecoins may not face: Stablecoins

may be able to offer economic options that a CBDC does not. For instance,
the European Central Bank is exploring a 3,000 euro limitation on the
amount of digital euro that can be held by one party, based on various
policy considerations. Stablecoins would be able to cater to those needing
larger holdings of a digital fiat currency equivalent. Similarly, a stablecoin
may choose to pay interest, or to pay a rate higher than a CBDC may offer.
• Current state and expected near-term innovation: Stablecoins may also be

in a better position to innovate, offering new features to their customers
than would a CBDC. In addition to having a first-mover advantage,
stablecoins are expected to continue to rapidly evolve and innovate over
the coming years, experimenting in ways CBDCs may not be able to due
to differences in size and scope. The private sector will be in a better
position to experiment and will have more incentive to do so, as individual
stablecoin providers vie for market share.
PART 6 Conclusion
Coinbase supports a broad, balanced, and

fact-based dialogue on stablecoins to form
the basis for a regulatory framework that
will enable responsible innovation.
We look forward to continuing to share our experience and expertise and
being a part of future consultations.

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PART 1 PART 2 PART 3 PART 4 PART 5 PART 6

Introduction Stablecoins Stablecoin Policy Policy Conclusion

2 Stablecoins and stablecoin arrangements 7

3 Stablecoin use cases 19

Stablecoins are digitally native payment

Policy choices about stablecoins will fundamentally shape the future of

1.1 Stablecoins and stablecoin arrangements

Throughout the whitepaper, we use the term “stablecoin” to refer to a digital

• Fiat-backed: Stablecoins backed by reserve assets in the traditional

• Crypto-backed: Stablecoins backed by digital assets that exist and are

These stablecoins fall into two types of arrangements:

• Custodial arrangements: Fiat-backed stablecoins have reserve assets

• Non-custodial arrangements: Crypto-backed and algorithmic stablecoins

1.2 Background and roadmap

Section 3 discusses the expanding range of stablecoins’ potential uses. The

Section 4 covers a wide range of policy considerations that will inform

• Financial stability and run risk

In Section 5 we conclude with our recommendations regarding the path

1.3 About Coinbase

Coinbase provides a trusted and easy-to-use platform for accessing the

Coinbase favors a comprehensive approach to the regulation of digital asset

PART 2 Stablecoins and stablecoin arrangements

1/1/2020 6/1/2020 1/1/2021 6/1/2021 1/1/2022 6/1/2022

Defining characteristics of stablecoins

Digitally native and programmable

Decentralized (peer-to-peer) transactions

2.1 Types of stablecoins

The core questions of stablecoin design are embodied in a problem known as

• Price stability is the strength of a stablecoin’s ability to maintain its peg,

• Capital efficiency refers to the total amount of assets (reserves plus a

• Decentralization is the extent to which control of a stablecoin

Each type of stablecoin represents a different tradeoff within the trilemma.

Figure 3: Stablecoin Trilemma

2.1.1 Fiat-backed stablecoins

A fiat-backed stablecoin is generally issued in exchange for a fiat currency

As of June 2022, an estimated 91.7% of the total market capitalization of

The fundamental factors affecting a stablecoin’s ability to maintain its peg

Data sourced from

JPMorgan, Onyx Coin Systems,

the USDF Consortium, as of 30

2.1.2 Crypto-backed stablecoins

A crypto-backed stablecoin is similar to a fiat-backed stablecoin in that

Crypto-backed stablecoins have another key difference from fiat-backed

Figure 5: Peg stability and market capitalization for DAI 30

The primary weakness of crypto-backed stablecoins is their capital

2.1.3 Algorithmic stablecoins

Algorithmic stablecoins are similar to crypto-backed stablecoins in that they

An endogenously backed algorithmic stablecoin involves two tokens: a

The primary weakness of algorithmic stablecoins is that their value could

Figure 6: Terra USD (UST) price in May 2022 35

2.2 Stablecoin arrangements: custodial and non-custodial

A stablecoin arrangement is the ecosystem around a stablecoin, including

Non-custodial arrangements seek to operate without the need for a

All fiat-backed stablecoins must operate within a custodial arrangement; fiat-

Table 1: Stablecoin arrangements – functions and activities

All of the functions and activities performed by a stablecoin arrangement

Consider three of a stablecoin arrangement’s core functions: (1) the creation

In a stablecoin arrangement, by contrast, each of the same three functions can

Maintaining the smooth functioning of our payments infrastructure is

PART 3 Stablecoin use cases

It is important for policymakers to

3.1 Digital asset trading – increasing digital asset market liquidity

Using stablecoins for digital asset trading is advantageous because it allows

Market: Global Industry Trends,