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Stablecoins: potential, risks and regulation

Author

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  • Douglas Arner
  • Raphael Auer
  • Jon Frost

Abstract

The technologies underlying money and payment systems are evolving rapidly. Both the emergence of distributed ledger technology (DLT) and rapid advances in traditional centralised systems are moving the technological horizon of money and payments. These trends are embodied in private "stablecoins": cryptocurrencies with values tied to fiat currencies or other assets. Stablecoins - in particular potential "global stablecoins" such as Facebook's Libra proposal - pose a range of challenges from the standpoint of financial authorities around the world. At the same time, regulatory responses to global stablecoins should take into account the potential of other stablecoin uses, such as embedding a robust monetary instrument into digital environments, especially in the context of decentralised systems. Looking forward, in such cases, one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems themselves, allowing for "embedded supervision". Yet it is an open question whether central bank digital currencies (CBDCs) and other initiatives could in fact provide more effective solutions to fulfil the functions that stablecoins are meant to address.

Suggested Citation

  • Douglas Arner & Raphael Auer & Jon Frost, 2020. "Stablecoins: potential, risks and regulation," BIS Working Papers 905, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:905
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    References listed on IDEAS

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    Cited by:

    1. Auer, Raphael & Shin, Hyun Song & Monnet, Cyril, 2021. "Distributed Ledgers and the Governance of Money," CEPR Discussion Papers 16752, C.E.P.R. Discussion Papers.
    2. Auer, Raphael & Tercero-Lucas, David, 2022. "Distrust or speculation? The socioeconomic drivers of U.S. cryptocurrency investments," Journal of Financial Stability, Elsevier, vol. 62(C).
    3. Yousaf, Imran & Yarovaya, Larisa, 2022. "Spillovers between the Islamic gold-backed cryptocurrencies and equity markets during the COVID-19: A sectorial analysis," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    4. José Luis Romero Ugarte & Abel Sánchez Martín & Carlos Martín Rodríguez & Justo Arenillas Cristóbal, 2021. "Implications for financial market infrastructures of a wholesale central bank digital currency based on distributed ledger technology," Financial Stability Review, Banco de España, issue MAY.
    5. Raphael Auer & Codruta Boar & Giulio Cornelli & Jon Frost & Henry Holden & Andreas Wehrli, 2021. "CBDCs beyond borders: results from a survey of central banks," BIS Papers, Bank for International Settlements, number 116.
    6. Allen, Franklin & Gu, Xian & Jagtiani, Julapa, 2022. "Fintech, Cryptocurrencies, and CBDC: Financial Structural Transformation in China," Journal of International Money and Finance, Elsevier, vol. 124(C).
    7. Erik Feyen & Jon Frost & Harish Natarajan & Tara Rice, 2021. "What Does Digital Money Mean for Emerging Market and Developing Economies?," Springer Books, in: Raghavendra Rau & Robert Wardrop & Luigi Zingales (ed.), The Palgrave Handbook of Technological Finance, pages 217-241, Springer.
    8. Elena Vladimirovna Travkina & Alim Borisovich Fiapshev & Marianna Tolevna Belova, 2022. "Stablecoin-Based Digital Trading and Investment Platforms and Their Potential in Overcoming Sanctions Restrictions," Economies, MDPI, vol. 10(10), pages 1-10, October.
    9. Tatiana A. Gorbacheva, 2022. "Stablecoins As a New Word in the Cryptocurrency Market," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 1, pages 126-139, February.
    10. Raphael Auer & Marc Farag & Ulf Lewrick & Lovrenc Orazem & Markus Zoss, 2022. "Banking in the shadow of Bitcoin? The institutional adoption of cryptocurrencies," BIS Working Papers 1013, Bank for International Settlements.
    11. Bibi, Samuele, 2023. "Money in the time of crypto," Research in International Business and Finance, Elsevier, vol. 65(C).
    12. Lyons, Richard K. & Viswanath-Natraj, Ganesh, 2023. "What keeps stablecoins stable?," Journal of International Money and Finance, Elsevier, vol. 131(C).
    13. José Luis Romero Ugarte & Abel Sánchez Martín & Carlos Martín Rodríguez & Justo Arenillas Cristóbal, 2021. "Implications for financial market infrastructures of a wholesale central bank digital currency based on distributed ledger technology," Financial Stability Review, Banco de España, issue Spring.
    14. Koray Caliskan, 2022. "The Elephant in the Dark: A New Framework for Cryptocurrency Taxation and Exchange Platform Regulation in the US," JRFM, MDPI, vol. 15(3), pages 1-18, March.
    15. Kanis Saengchote, 2022. "Decentralized lending and its users: Insights from Compound," Papers 2212.05734, arXiv.org.
    16. Charles M. Kahn & Maarten R.C. van Oordt, 2022. "The Demand for Programmable Payments," Tinbergen Institute Discussion Papers 22-076/IV, Tinbergen Institute.
    17. Raphael A. Auer, 2022. "Embedded Supervision: How to Build Regulation into Decentralised Finance," CESifo Working Paper Series 9771, CESifo.
    18. Emilio Barucci & Giancarlo Giuffra Moncayo & Daniele Marazzina, 2022. "Cryptocurrencies and stablecoins: a high-frequency analysis," Digital Finance, Springer, vol. 4(2), pages 217-239, September.
    19. Arto Kovanen, 2022. "Second Thoughts About Central Bank Digital Currencies," Applied Economics and Finance, Redfame publishing, vol. 9(1), pages 1-18, December.
    20. Jean Barthélémy & Paul Gardin & Benoit Nguyen, 2023. "Stablecoins and the Financing of the Real Economy," Working papers 908, Banque de France.
    21. Marcel Bluhm & Adrian Cachinero Vasiljevi'c & S'ebastien Derivaux & S{o}ren Terp H{o}rluck Jessen, 2024. "Real-time Risk Metrics for Programmatic Stablecoin Crypto Asset-Liability Management (CALM)," Papers 2401.13399, arXiv.org.
    22. Raphael Auer & Cyril Monnet & Hyun Song Shin, 2021. "Permissioned Distributed Ledgers and the Governance of Money," Diskussionsschriften dp2101, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    Keywords

    stablecoins; cryptocurrencies; crypto-assets; blockchain; distributed ledger technology; central bank digital currencies; fintech; central banks; regulation; supervision; money;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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