March 23, 2023

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March 22, 2023

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March 20, 2023

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digital daily: Stablecoins

The instability of some stablecoins has led regulators to doubt the “stable” moniker. HUSD de-pegged from the US dollar this week as a fresh example. The issue is design, not naming convention. Reasonably, regulators worry that without strict oversight, a flawed digital dollar may penetrate the broader financial system and increase instability. The resolution is oversight of novel intermediaries by the Federal Reserve. This is how USD stablecoin issuers are expected to integrate into the mainstream of finance, and fresh legislation from US Congress in 2023 will provide definitive direction. But the absence of contagion to other stablecoins from unstable designs is notable and encouraging. Tether saw rapid 12% outflows in May, managed without a break to the USD peg. The market capitalization of USDC has been down 25% in the past three months without any hint of de-pegging to the US dollar. Gordon Liao’s terrific paper on macroprudential issues around digital dollars frames the issues. Gordon brings conventional bank liquidity metrics into the stablecoin universe. Take the Basel III Liquidity Coverage Ratio, for instance. It is built to ensure banks can meet stressed liquidity needs based on the ratio of high-quality liquid assets versus stressed net cash outflows. The largest US banks have LQRs of around 120%; USDC has a ratio of about 200%. Regulatory focus on stablecoins runs much deeper than any single metric. But to bring digital into the mainstream, speaking the language of regulatory norms is a productive step. Stablecoins are not all created equal – nor are banks – and they will remain foundational to digital asset markets.