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Stablecoins do not have mechanisms that maintain the stability of fiat currency

according to someone to work According to the report published by the Bank for International Settlements (BIS), stablecoins will lack important mechanisms that ensure the stability of the fiat money market, and an operating model that gives regulatory control to the central bank will be superior to private stablecoins.
To investigate the weaknesses of stablecoin settlement mechanisms, the authors applied the “monetary perspective” of the stablecoin and an analogy with onshore and offshore US dollar settlement.
According to the research:

“In both Eurodollar and foreign exchange markets, where the flexibility of private bank lending has reached its limits [cioè perde la capacità di mantenere la parità]“Central bank lending intervenes with the ultimate goal of maintaining parity in the global dollar settlement.”

When eurodollar holders tried to land their funds during the financial crisis of the late 2000s, the Federal Reserve provided a $600 billion liquidity swap to other central banks to support the pair, using what the authors describe as a “non-trivial institutional framework.” apparatus”.

Related: BOE chief rejects cryptocurrencies, stablecoins in favor of ‘advanced digital currency’

Stablecoins bridge on-chain and off-chain funds and maintain parity with the fiat US dollar through up to three mechanisms: reserves, overcollateralization, and/or algorithmic trading protocol.
Specifically, reserves are “the equivalent value of safe short-term dollar assets.” According to the authors, stablecoins mistakenly assume their solvency (ability to meet long-term demand) based on their liquidity (ability to meet short-term demand), whether tied to reserves or an algorithm.
Moreover, reserves are inevitably tied to the fiat money market. This ties the stability of stablecoins to fiat money market conditions, but there are mechanisms to try to maintain bank liquidity both onshore and offshore in the event of economic stress. Stablecoin does not have such mechanisms. One example the authors offer is the 2023 banking crisis:

“Central banks were probably surprised to discover that the lender of last resort that backed Silicon Valley Bank in March 2023 was also the lender of last resort for USDC, a stablecoin that holds significant deposits in SVB, possibly as liquid reserves.

Moreover, stablecoins need to maintain parity with each other. Bridges are another sore point. The authors compare blockchain bridges to currency merchants that rely on credit to offset imbalances in order flow. Stablecoins cannot do this. High interest rates common across the chain make their business even more difficult.

The study shows that the regulated accountability network model Solution to the challenges faced by stablecoins. In this model, all loans are deposited into a single ledger and are placed within a regulatory framework. “The commitment of a full-fledged banking system would involve the central bank and therefore have a reliability that existing private crypto-type stablecoins do not have.”say the authors.
BIS gave more importance to stablecoins. In early November, he published a study examining examples of stablecoins that failed to maintain their fixed value. This is in addition to the legal attention the stablecoin has receivedEuropean UnionInside United Kingdom And United States of Americais testament to its growing role in finance.

Translation by Walter Rizzo

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