Setting Standards for Stablecoin Reserves

15 Pages Posted: 28 Nov 2021

See all articles by Christian Catalini

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Diem Association and Diem Networks US; National Bureau of Economic Research (NBER)

Nihar Shah

Novi Financial, Inc.

Date Written: November 24, 2021

Abstract

US regulators have suggested that only FDIC-insured financial institutions be allowed to issue stablecoins. We propose an alternative path, which provides similar guarantees in terms of financial resilience, but without the same narrow restriction on issuers and negative consequences on innovation and competition. Stablecoin issuers should comply with the capital and liquidity standards encoded in the Basel accords, and put aside appropriate capital buffers to mitigate credit risk, market risk, and operational risk. Furthermore, stablecoin issuers should hold appropriate liquidity to mitigate sudden redemptions and outflows. While many existing stablecoin issuers would struggle to comply with such standards under their current reserve design, they could successfully comply under a simpler balance sheet centered around short-maturity, high-quality, and liquid assets such as 3 months or less U.S. Treasuries.

Suggested Citation

Catalini, Christian and Shah, Nihar, Setting Standards for Stablecoin Reserves (November 24, 2021). Available at SSRN: https://ssrn.com/abstract=3970885 or http://dx.doi.org/10.2139/ssrn.3970885

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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HOME PAGE: http://https://mitsloan.mit.edu/faculty/directory/christian-catalini

Diem Association and Diem Networks US ( email )

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National Bureau of Economic Research (NBER) ( email )

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Nihar Shah

Novi Financial, Inc. ( email )

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Menlo Park, CA 94025

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