Some Simple Economics of Stablecoins

Posted: 10 Nov 2022

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)

Alonso de Gortari

Novi Financial, Inc.

Nihar Shah

Novi Financial, Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2022

Abstract

Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins also represent an ideal setting for understanding the key trade-offs cryptocurrencies involve, and insights from robust stablecoin design and regulation are highly relevant for related innovations in decentralized finance (DeFi), nonfungible tokens, and Web3 protocols. In this review, we describe the following: key stablecoin design choices, from reserve composition to stability mechanism; legal claim against the issuer; noninterference with macroeconomic stability; and interoperability with public sector payment rails and central bank digital currencies. Last, we cover the key benefits of stablecoins in the context of real-time, low-cost programmable payments, financial inclusion, and DeFi.

Suggested Citation

Catalini, Christian and de Gortari, Alonso and Shah, Nihar, Some Simple Economics of Stablecoins (November 1, 2022). Annual Review of Financial Economics, Vol. 14, pp. 117-135, 2022, Available at SSRN: https://ssrn.com/abstract=4267974 or http://dx.doi.org/10.1146/annurev-financial-111621-101151

Christian Catalini (Contact Author)

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

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Diem Association and Diem Networks US ( email )

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National Bureau of Economic Research (NBER) ( email )

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Alonso De Gortari

Novi Financial, Inc.

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Menlo Park, CA 94025

Nihar Shah

Novi Financial, Inc. ( email )

1 Hacker Waya
Menlo Park, CA 94025

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