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Stablecoins: Adoption and Fragility

Author

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  • Bertsch, Christoph

    (Research Department, Central Bank of Sweden)

Abstract

Stablecoins promise a stable and secure way to park funds in the crypto universe. However, stablecoin issuers are vulnerable to runs triggered by negative information about the quality and liquidity of their reserves, as well as custodial, operational, and technological risks. I propose a framework for analyzing the factors influencing stablecoin adoption and fragility, which offers insights for risk assessment and appropriate regulation, as well as new testable implications. Under the premise that payment preferences are heterogeneous across potential stablecoin holders, a wider adoption of stablecoins is associated with a destabilizing composition effect. Positive network effects mitigate the destabilizing composition effect, but they may also undermine the role of bank deposits as a means of payment. The marginal stablecoin adopter does not internalize these effects. Consequently, adoption is likely to be excessive. Factors that increase the issuer’s income from fees and seigniorage promote stability, as do congestion effects. A stablecoin lending market promotes both stability and adoption, if it is not undermined by speculation. The introduction of a moral hazard problem provides additional insights into reserve management and disclosure.

Suggested Citation

  • Bertsch, Christoph, 2023. "Stablecoins: Adoption and Fragility," Working Paper Series 423, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0423
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    References listed on IDEAS

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    Cited by:

    1. Jonathan Chiu & Cyril Monnet, 2024. "Public and Private Money Creation for Distributed Ledgers: Stablecoins, Tokenized Deposits, or Central Bank Digital Currencies?," Staff Working Papers 24-35, Bank of Canada.
    2. Brian Zhu, 2024. "Stablecoin Runs and Disclosure Policy in the Presence of Large Sales," Papers 2408.07227, arXiv.org.
    3. Philippe Bergault & Louis Bertucci & David Bouba & Olivier Gu'eant & Julien Guilbert, 2024. "Automated Market Making: the case of Pegged Assets," Papers 2411.08145, arXiv.org.

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    More about this item

    Keywords

    Stablecoins; money; payment preferences; financial stability; global games;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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