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Some Simple Economics of Stablecoins

Author

Listed:
  • Christian Catalini

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA)

  • Alonso de Gortari

    (Novi Financial, Inc., Menlo Park, California, USA)

  • Nihar Shah

    (Novi Financial, Inc., Menlo Park, California, USA)

Abstract

Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins also represent an ideal setting for understanding the key trade-offs cryptocurrencies involve, and insights from robust stablecoin design and regulation are highly relevant for related innovations in decentralized finance (DeFi), nonfungible tokens, and Web3 protocols. In this review, we describe the following: key stablecoin design choices, from reserve composition to stability mechanism; legal claim against the issuer; noninterference with macroeconomic stability; and interoperability with public sector payment rails and central bank digital currencies. Last, we cover the key benefits of stablecoins in the context of real-time, low-cost programmable payments, financial inclusion, and DeFi.

Suggested Citation

  • Christian Catalini & Alonso de Gortari & Nihar Shah, 2022. "Some Simple Economics of Stablecoins," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 117-135, November.
    • Handle: RePEc:anr:refeco:v:14:y:2022:p:117-135
    DOI: 10.1146/annurev-financial-111621-101151
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    Citations

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    Cited by:

    1. van Buggenum, Hugo & Gersbach, Hans & Zelzner, Sebastian, 2023. "Contagious Stablecoins?," CEPR Discussion Papers 18521, C.E.P.R. Discussion Papers.
    2. Joshua S. Gans, 2024. "Cryptic Regulation of Crypto-Tokens," Entrepreneurship and Innovation Policy and the Economy, University of Chicago Press, vol. 3(1), pages 139-163.
    3. Fernandez-Mejia, Julian, 2024. "Extremely stablecoins," Finance Research Letters, Elsevier, vol. 63(C).
    4. Saengchote, Kanis & Samphantharak, Krislert, 2024. "Digital money creation and algorithmic stablecoin run," Finance Research Letters, Elsevier, vol. 64(C).
    5. Kensuke Ito, 2024. "Cryptoeconomics and Tokenomics as Economics: A Survey with Opinions," Papers 2407.15715, arXiv.org.
    6. Chen Liang & Murat Tunc & Gordon Burtch, 2024. "The Market Consequences of Perceived Strategic Generosity: An Empirical Examination of NFT Charity Fundraisers," Papers 2401.12064, arXiv.org, revised Dec 2024.
    7. Oefele, Nico & Baur, Dirk G. & Smales, Lee A., 2024. "Flight-to-quality—Money market mutual funds and stablecoins during the March 2023 banking crisis," Economics Letters, Elsevier, vol. 234(C).

    More about this item

    Keywords

    Bitcoin; blockchain; CBDC; central bank digital currency; cryptocurrency; digital currency; stablecoins;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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