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CBI StablecoinWhitepaper July2022
CBI StablecoinWhitepaper July2022
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
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.
STABLECOINS WHITE PAPER 3
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.
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.
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.
• 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 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.
STABLECOINS WHITE PAPER 5
Section 2 of the paper provides an overview of the stablecoin market and types
of stablecoins. Approximately $145 billion in stablecoins are in circulation
today.4 Fiat-backed stablecoins represent 91.7% of this amount, and nearly all
are pegged to the U.S. dollar.5 Fiat-backed stablecoins have generally been
successful in maintaining their pegs, though as we discuss below they are
not without risk. Some crypto-backed stablecoins have also established good
track records, even through periods of market dislocation. DAI, for example,
makes innovative use of smart contracts and over-collateralization to protect
4
The Block, Stablecoins,
its value against the volatility of prices of other digital assets. In contrast,
as of 30 June 2022 algorithmic stablecoins like TerraUSD (UST) have attempted to use smart
contracts to maintain their pegs without collateral, and almost all of these
5
Id. have failed. We discuss the successes and the failures in Section 2.
Figure 1: Market capitalization of USDT, USDC, BUSD, DAI14 ($BN, 1/1/20 – 6/30/22)
180
160
140
120
100
80
60
40
20
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.
STABLECOINS WHITE PAPER 8
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
STABLECOINS WHITE PAPER 9
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.
STABLECOINS WHITE PAPER 10
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.
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
STABLECOINS WHITE PAPER 12
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
CryptoCompare, as of 30
June 2022
STABLECOINS WHITE PAPER 13
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.
30
Id.
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.
STABLECOINS WHITE PAPER 16
35
Data sourced from
CryptoCompare, as of
30 June 2022
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.
STABLECOINS WHITE PAPER 17
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.
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.
Figure 7: Share of Centralized Exchange trading volume: USDC, USDT, BUSD, DAI 39
%, 30 day moving average, 1/1/2018 – 6/30/2022
CryptoCompare, as of
30 June 2022
STABLECOINS WHITE PAPER 21
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:
40
BIS, The journey so far: making
cross-border remittances work
for financial inclusion (15 June
2022)
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
STABLECOINS WHITE PAPER 23
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.
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
• insurance solutions
• automatic payments
e.g., rent, salaries, subscriptions, etc.
• prediction markets
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.
STABLECOINS WHITE PAPER 25
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.
STABLECOINS WHITE PAPER 26
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)
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.
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.
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.
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.
STABLECOINS WHITE PAPER 28
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.
• 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.
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.
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
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.
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.
STABLECOINS WHITE PAPER 32
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:
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.
STABLECOINS WHITE PAPER 33
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.
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.
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.
STABLECOINS WHITE PAPER 36
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.
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.
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
STABLECOINS WHITE PAPER 37
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 WHITE PAPER 38
PART 6 Conclusion