Stablecoins Need Central Bank Regulation for Greater Stability, BIS Report Suggests
Summary:
A study by the Bank for International Settlements (BIS) warns stablecoins lack essential stability measures found in the fiat money market, presenting potential financial risks. It suggests a central bank regulated operational model as a solution which could increase stability and reliability. The report also emphasizes how stablecoins confuse solvency with liquidity and lack mechanisms to maintain liquidity in financial crises, making them vulnerable. The study highlights the growing importance of stablecoins in finance and the need for regulation.
According to a report by the Bank for International Settlements (BIS), stablecoins lack essential measures that provide stability in the fiat money market. The study suggests a centralized banking system regulating stablecoins can significantly improve its functioning. By comparing stablecoin to onshore and offshore USD settlement methods, the authors identify stablecoin's settlement shortcomings.
The study also refers to scenarios when pressures on the private bank credit lead to central bank intervention, aiming to protect parity in global dollar settlement. During the financial crisis that hit the late 2000s, the Federal Reserve funded other central banks with a liquidity swap of $600 billion to maintain parity through a non-trivial institutional apparatus.
Stablecoins bridge on-chain and off-chain funds while maintaining parity with the fiat USD via reserves, overcollateralization, or an algorithmic trading protocol. The study highlights how stablecoins confuse their solvency with their liquidity, regardless of whether they rely on reserves or algorithms.
Due to their link with the fiat money market, stablecoin's stability is tied to the market conditions. However, unlike the fiat, stablecoins lack mechanisms to ensure liquidity during economic instability. A recent banking crisis exemplifies how stablecoins assume the role of the lender of last resort when held by a bank facing liquidity crunch. Additionally, stablecoins face the challenge of maintaining parity with each other. Blockchain bridges, similar to foreign exchange dealers, are excessively reliant on credit to balance order flow, a feat stablecoins are incapable of achieving.
The BIS study proposes the Regulated Liability Network as a suitable solution for the issues faced by stablecoin. In this model, all claims are settled on a single ledger under regulatory oversight. This would present a fully operational banking system that could ensure the reliability, currently lacking in private crypto stablecoins. The growing attention towards stablecoin by BIS and its increasing influence in financial markets signal its emergence as a noteworthy financial instrument.
Published At
11/17/2023 10:02:58 PM
Disclaimer: Algoine does not endorse any content or product on this page. Readers should conduct their own research before taking any actions related to the asset, company, or any information in this article and assume full responsibility for their decisions. This article should not be considered as investment advice. Our news is prepared with AI support.
Do you suspect this content may be misleading, incomplete, or inappropriate in any way, requiring modification or removal?
We appreciate your report.