Managing Stablecoins: Optimal Strategies, Regulation, and Transaction Data as Productive Capital

Fisher College of Business Working Paper No. 2020-03-030

Charles A. Dice Center Working Paper No. 2020-30

48 Pages Posted: 30 Dec 2020 Last revised: 31 Dec 2020

See all articles by Ye Li

Ye Li

Ohio State University

Simon Mayer

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: December 30, 2020

Abstract

In a dynamic model of stablecoins, we show that even with over-collateralization, a pledge of one-to-one convertibility to a reference currency is not sustainable in a stochastic environment. The distribution of states is bimodal - a fixed exchange rate can persist, but debasement happens with a positive probability and recovery is slow. When negative shocks drain the reserves that back stablecoins, debasement allows the issuer to share risk with users. Collateral requirements cannot eliminate debasement, because risk sharing is ex-post efficient under any threat of costly liquidation, whether it is due to reserve depletion or violation of regulation. Optimal stablecoin management requires a combination of strategies commonly observed in practice, such as open market operations, transaction fees or subsidies, re-pegging, and issuance and repurchase of ``secondary units'' that function as stablecoin issuers' equity. The implementation varies with user-network effects and is guided by Tobin's q of transaction data as productive capital.

Keywords: stablecoin, reserve management, stablecoin regulation, debasement, big data, payment system, collateral, open market operations, secondary units, governance token

JEL Classification: E41, E42, E51, E52, F31, G12, G18, G21, G31, G32, G35, L14, L86

Suggested Citation

Li, Ye and Mayer, Simon, Managing Stablecoins: Optimal Strategies, Regulation, and Transaction Data as Productive Capital (December 30, 2020). Fisher College of Business Working Paper No. 2020-03-030, Charles A. Dice Center Working Paper No. 2020-30, Available at SSRN: https://ssrn.com/abstract=3757083 or http://dx.doi.org/10.2139/ssrn.3757083

Ye Li (Contact Author)

Ohio State University ( email )

Fisher Hall 836, 2100 Neil Ave
Columbus, OH 43210
United States

HOME PAGE: http://yeli-macrofinance.com

Simon Mayer

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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