Leverage and Stablecoin Pegs

75 Pages Posted: 28 Dec 2022 Last revised: 9 Apr 2024

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Elizabeth C. Klee

Federal Reserve Board of Governors

Chase P. Ross

Board of Governors of the Federal Reserve System

Sharon Y. Ross

Board of Governors of the Federal Reserve System

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2022

Abstract

Money is debt that circulates with no questions asked. Stablecoins are a new form of private money that circulates with many questions asked. Major stablecoins have largely maintained their pegs even though they face run risk and traditionally pay no interest. We show that stablecoins' use in crypto speculation is an important compensating factor for run risk. Stablecoin owners are indirectly compensated for run risk because they can lend the coins to speculators. The stablecoin can then support its $1 peg. We show how this arrangement links crypto speculation to the traditional financial markets where stablecoins invest their reserves.

Keywords: Stablecoins, Crypto, Leverage, Money, Global Games, Speculation

JEL Classification: G00, G10, G20, G23

Suggested Citation

Gorton, Gary B. and Klee, Elizabeth C. and Ross, Chase P. and Ross, Sharon and Vardoulakis, Alexandros, Leverage and Stablecoin Pegs (December 16, 2022). Available at SSRN: https://ssrn.com/abstract=4304954 or http://dx.doi.org/10.2139/ssrn.4304954

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Elizabeth C. Klee

Federal Reserve Board of Governors

Chase P. Ross

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sharon Ross

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sharonyross.com

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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