News
Regulating the Crypto Ecosystem
05/10/2022
The Case of Stablecoins and Arrangements
Stablecoins are crypto assets that aim to maintain a stable value relative to a specified asset or a pool or basket of assets.
To achieve stability, assets backing stablecoins are usually held.2 These can be fiat currencies, bank deposits, short-term market instruments, and even other crypto assets. There are various types of stabilizing mechanisms, some of which are vulnerable to risks in a stressed market environment. So far, stablecoins have been issued by non banks, which are lightly regulated or unregulated. This paper focuses on stablecoins with a face value denominated in a monetary unit of account, such as the US dollar, and backed by financial assets, such as high-quality bonds.
Stablecoins have experienced periods of rapid growth, which also accelerated links between traditional finance and the crypto ecosystem. In 2021, the market value of stablecoins quadrupled in conjunction with the rise of decentralized finance (DeFi), although it has since fallen in line with the broader crypto market. Dollar-denominated stablecoins are growing in popularity in emerging market and developing economies as a potential store of value and hedge against inflation and exchange rate volatility, raising risks of dollarization and cryptoization. The involvement of large financial institutions in areas like reserve management, custody, and issuance has the potential to rapidly generate new risks. In addition, higher volatility correlation has been observed between stablecoins and stock markets, especially during recent market stress periods. Without proper regulation, contagion risks between traditional finance and crypto ecosystem will increase...
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p/o Virginie Gastine Menou
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