BIS Study Finds Stablecoins Lack Crucial Mechanisms for Money Market Stability

According to Cointelegraph, a study by the Bank for International Settlements (BIS) found that stablecoins lack essential mechanisms that ensure money market stability in fiat currencies. The study suggests that an operational model giving regulatory control to a central bank would be superior to private stablecoins. The authors used a 'money view' of stablecoins and an analogy with onshore and offshore USD settlement to examine the weaknesses of stablecoin settlement mechanisms. Stablecoins maintain par with the fiat USD through up to three 'superficial' mechanisms: reserves, overcollateralization, and/or an algorithmic trading protocol. However, the study argues that stablecoins mistakenly assume their solvency based on their liquidity, whether they depend on reserves or an algorithm. Additionally, reserves are unavoidably tied to the fiat money market, which ties stablecoin stability to fiat money market conditions. During economic stress, there are mechanisms in place to maintain bank liquidity both onshore and offshore, but stablecoins lack such mechanisms. The study suggests that the Regulated Liability Network provides a model solution to the difficulties faced by stablecoins. In this model, all claims are settled on a single ledger and are inside a regulatory perimeter. The authors believe this would include the central bank and thus have credibility that today's private crypto stablecoins lack. The BIS has been paying increased attention to stablecoins, releasing a study earlier in November examining examples of stablecoins failing to maintain their pegged value. This, along with legislative attention in the European Union, United Kingdom, and United States, highlights the growing role of stablecoins in finance.