The relative stability of stablecoins: Part 2

by Garima Parakh

The regulation of stablecoins is following a "low-hanging fruit" trajectory whereby market regulators are currently targeting stablecoins and central bank digital currencies (CBDCs). Extant legislative proposals are at various stages of enactment in different countries, however, the focus of this article shall remain on the proposals in the UK in comparison to the US and EU. The Bank of England and HM Treasury are exploring possible infrastructural roadmaps to launch a digital pound, while retaining the current payment and settlement methods. In collaboration with the Bank for International Settlements (BIS) through Project Rosalind, the goal is to develop application programming interface prototypes for a two-tier retail CBDC (rCBDC) model. Coupled with BIS London's Project Pyxtrial, which aims to enable regulators and supervisors to collect and analyse data as to the liabilities of fiat-backed stablecoins to identify any mismatch with their asset backing, there is slow but steady progress towards a framework for rCBDCs and stablecoins. Admittedly, regulators across the board face the classic trilemma of only any two of scalability, decentralisation and security being satisfied at any point in time. Notwithstanding the technological and data privacy challenges, a phased implementation of rCBDCs with end-user holding restrictions to maintain the stability of systems operating on commercial bank money can be a prudent policy choice. In terms of stablecoins, regulation must solve two key problems - one, anchor stablecoin value to ensure stability, and two, have contingencies in place in the event of instability in the cryptocurrency market, contagion due to the instability in the traditional market or a death spiral of stablecoin(s). Current regulatory proposals intend to govern stablecoins as payment methods, or e-money, as regulators slowly recognise the distinctive functions of this cryptoasset category compared to those that are akin to securities/commodities. Linkages between CBDC models and stablecoins would offer optimum market solutions.