According to a research by the Bank for International Settlements (BIS), stablecoins are devoid of crucial components that guarantee the stability of the money market for fiat currencies. The paper contends that private stablecoins would be inferior to an operational model that grants a central bank regulatory authority. The authors examined the shortcomings of stablecoin settlement systems using a “money view” of stablecoins and a comparison with onshore and offshore USD settlement.
Through three’superficial’ mechanisms—reserves, overcollateralization, and/or an algorithmic trading protocol—stablecoins are kept on level with the US dollar. Stablecoins, whether they rely on reserves or an algorithm, erroneously believe that their liquidity indicates their solvency, according to the study. Furthermore, the fiat money market is inextricably linked to reserves, which links stablecoin stability to fiat money market circumstances. Stablecoins lack the onshore and offshore systems that are in place to maintain bank liquidity during economic hardship.
According to the report, the Regulated Liability Network offers a model remedy for the problems that stablecoins encounter. This paradigm places all claims inside a regulatory boundary and settles them on a single ledger. According to the authors, this would involve the central bank and have legitimacy that current private cryptocurrency stablecoins do not. Stablecoins have been receiving more attention from the BIS, which released a report earlier in November that looked at instances of stablecoins losing their pegged value. This emphasises the expanding significance of stablecoins in the financial industry, as does legislative focus in the US, the UK, and the EU.