The European Central Bank ("ECB")has recently issued an Occasional Paper entitled "In search for stability in crypto-assets: are stablecoins the solution?" (the "Paper"). The Paper provides a description of stablecoins and assesses to what extent they can maintain a stable value. Indeed, the Paper is structured as follows:
1. Overview and taxonomy of the stablecoin
The Paper relies on a novel framework for the classification of stablecoins based on the different primary mechanisms used to stabilise their value. To this end, the Paper classifies stablecoins as follows:
i. Tokenised funds: This relates to stablecoins supported by funds, which implies the issuer’s commitment to their redeemability and the requirement for someone to take responsibility for their safekeeping;
ii. Off-chain collateralised stablecoins: These stablecoins are supported by other traditional asset classes, which require a custodian for their safekeeping and are in the possession of the issuer only as long as the user does not claim them back;
iii. On-chain collateralised stablecoins: These stablecoins are supported by assets, typically crypto-assets, which can be held for safekeeping in a decentralised manner and do not need an issuer to be identified; and
iv. Algorithmic stablecoins: supported solely by users’ expectations about the future purchasing power of their holdings, which does not require the accountability of any party, nor the custody of any underlying asset.
2. Innovation and volatility of different types of stablecoins
The Paper provides an analysis of different types of stablecoins which shows a trade-off between the novelty of the stabilisation mechanism used in an initiative and its capacity to maintain a stable market value.
3. Summary of main findings
The Paper concludes that the different taxonomies and the current market landscape shows that some major stablecoin projects follow the business model of traditional e-money and pre-funded payment systems and such initiatives are classified as stablecoins to the extent that they may, on a case-by-case basis, fall outside the current regulatory regimes. Nonetheless, they pose the same risks as their non-DLT competitors.
Furthermore, the analysis in the Paper between innovation and volatility of the different types of stablecoins shows that whereas stablecoins that offer less innovation could be a useful solution for those users requiring a stable store of value, the role of are more innovative but volatile stablecoins is still to be seen.
Finally, the Paper recognises that uncertainties in the governance and regulatory treatment of stablecoin projects still exists and proposes that improvements to the governance of such projects, including procedures to update the smart contracts and a having a cyber-security framework. On the other hand, the Paper acknowledges that stablecoin projects with a clear governance structure may still be hindered by the lack of regulatory scrutiny and recognition.
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