The post Circle Proposes New Capital-Risk Framework for Stablecoins appeared on BitcoinEthereumNews.com.

Iris Coleman Aug 16, 2024 11:13 Circle’s top financial leaders introduce a risk-based capital framework tailored for stablecoins, addressing unique risks and operational challenges. The rise of tokenized finance, particularly stablecoins and other stable value tokens, has introduced new dynamics and challenges for financial institutions in managing and assessing their capital needs. According to Circle’s blog, three of Circle’s top financial leaders—Chief Economist Gordon Liao, Treasurer Dan Fishman, and Chief Financial Officer Jeremy Fox-Geen—have proposed a risk-based capital framework tailored to these digital assets. Understanding the Token Capital Adequacy Framework (TCAF) The proposed framework, named the Token Capital Adequacy Framework (TCAF), aims to adapt to the distinct characteristics and risks inherent in stable value tokens. The paper, titled ‘Risk-based Capital for Stable Value Tokens,’ demonstrates how a risk-based capital framework can establish a foundation for safety and soundness in tokenized finance. Capital, fundamentally, is the difference between a financial institution’s assets and liabilities, serving as a buffer against potential losses. In traditional banking, capital adequacy is designed to help institutions weather financial shocks, maintain customer confidence, and prevent runs. Circle’s executives argue that stablecoins and other stable value tokens require more specialized capital standards due to their tokenized nature, which presents unique characteristics. Key Features of TCAF The TCAF provides a robust methodology to assess, manage, and allocate capital for stable value tokens, enabling them to better withstand potential shocks and maintain stability. Unlike traditional banks, stable value tokens are transferred on programmable blockchains or distributed ledgers, creating unique financial and operational risk profiles that traditional Basel-style capital requirements cannot adequately address. Moreover, existing capital frameworks that rely on fixed ratios do not account for the reserve differences with stable value tokens, nor do they cover risks such as susceptibility to coordinated runs and technology-driven operational risks. TCAF Highlights Developed…

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Filed under: News - @ August 17, 2024 3:13 am