A Method for Estimating the Price of Stablecoin Insurance

As crypto assets such as stablecoins have gained traction in recent years, they have also raised financial stability concerns. The attention has likely been motivated by a steady stream of stablecoin collapses, which are essentially bank runs. One approach to mitigating this risk could be to insure stablecoins in a way similar to bank deposits—that is, with a third-party guarantee to cover the depositor’s (or coin-holder’s) losses should the bank (or issuer) collapse. Because stablecoins have many functional similarities to bank deposits, the theory underlying deposit insurance pricing may be applicable to pricing insurance for stablecoins. Chris Acker and Stefan Jacewitz estimate the cost of guaranteeing against stablecoin losses using standard option pricing methods as applied to bank deposit insurance. Using this technique on four major (unnamed) stablecoins, they estimate that the annualized cost to guarantee stablecoins against losses for 90 days ranges from nearly zero to almost $0.13 per dollar of stablecoins. These estimates vary substantially among stablecoin issuers and across time. Understanding these estimates could be useful to policymakers in evaluating proposals for stablecoin insurance or as a reference point from which to assess possible alternatives.