The post BIS report reveals the vulnerabilities in Stablecoins appeared on BitcoinEthereumNews.com.

Stablecoins, as scrutinized in a recent study by the Bank for International Settlements (BIS), appear to lack fundamental mechanisms crucial for ensuring stability in money markets compared to their fiat counterparts. The study argues that a model assigning regulatory control to a central bank would outperform private stablecoins in terms of reliability and stability. BIS compares stablecoins with other USD settlements mechanisms Taking a “money view” approach, the study draws parallels between stablecoins and onshore/offshore USD settlement mechanisms, shedding light on vulnerabilities in stablecoin settlement systems. In established markets such as Eurodollars and foreign exchange (FX), when private bank credit faces constraints, central bank credit intervenes to safeguard parity in global dollar settlements. An illustrative example is the financial crisis of the late 2000s, where the Federal Reserve executed a $600 billion liquidity swap with other central banks, employing a sophisticated institutional apparatus to maintain parity. Stablecoins serve as a conduit between on-chain and off-chain funds, striving to preserve parity with the fiat USD through various mechanisms, including reserves, overcollateralization, and/or algorithmic trading protocols. The BIS study underscores the importance of reserves, characterizing them as “an equivalent value of short-term safe dollar assets.” It contends that stablecoins might erroneously assume solvency—long-term demand-meeting capacity—based on their liquidity, which addresses short-term demand. This liquidity can be derived from reserves or algorithmic strategies. The study highlights that reserves are inherently tied to the fiat money market, correlating stablecoin stability with the conditions of the fiat money market. During periods of economic stress, traditional banking systems deploy mechanisms to uphold liquidity both onshore and offshore, mechanisms that stablecoins lack. The study cites a recent banking crisis as an example, where central banks found themselves unintentionally providing lender-of-last-resort support not only to traditional banks but also to stablecoins holding substantial deposits at these banks. Stablecoins…

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Filed under: News - @ November 18, 2023 4:20 pm