What Keeps Stable Coins Stable?

50 Pages Posted: 10 Jan 2020

See all articles by Richard K. Lyons

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Ganesh Viswanath-Natraj

University of Warwick - Warwick Business School

Date Written: December 21, 2019

Abstract

We take this question to be isomorphic to, "What Keeps Fixed Exchange Rates Fixed?" and address it with analysis familiar in exchange-rate economics. Stable coins aim to solve the volatility problem by pegging to a national currency, such as the US dollar, and are used as vehicle currencies for exchanging national currencies into non-stable cryptocurrencies. Using a rich dataset of signed trades and order books on multiple crypto exchanges, we examine how peg-sustaining arbitrage stabilizes the dollar price of the largest stable coin, Tether, as an alternative to the main mechanism with national-currency fixed rates, namely intervention by a central bank. We find that stable-coin issuance, the closest analogue to central-bank intervention, plays only a limited role in stabilization, pointing instead to the demand side as the fundamental stabilizing force. Order-flow data show that a 25 basis-point move requires arrival of a roughly two standard deviation change in net trading, equivalent to $3 million. Finally, we investigate which fundamentals drive the two-sided distribution of peg-price deviations; premiums are due to stable coins' role within the digital-asset economy as a safe-haven asset, whereas discounts derive from both liquidity effects and collateral concerns.

Keywords: cryptocurrency, fixed exchange rates, monetary policy, intervention

JEL Classification: E5, F3, F4, G15, G18

Suggested Citation

Lyons, Richard K. and Viswanath-Natraj, Ganesh, What Keeps Stable Coins Stable? (December 21, 2019). Available at SSRN: https://ssrn.com/abstract=3508006 or http://dx.doi.org/10.2139/ssrn.3508006

Richard K. Lyons

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ganesh Viswanath-Natraj (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://ganeshvnatraj.netlify.com

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