Risk-based Capital for Stable Value Tokens

Abstract

This paper introduces Token Capital Adequacy Framework (TCAF), a risk-based capital framework designed for stable value tokens, including stablecoins, deposit tokens, and tokenized cash. TCAF assesses the capital requirements by considering both financial and non-financial risks that issuers face. Notably, TCAF quantifies the capital needed to absorb losses stemming from technological, infrastructure, and operational risks, particularly in an environment marked by rapid innovation and limited historical loss data. We apply the framework to past stress events involving stablecoins and demonstrate that TCAF is a more effective prudential tool compared to fixed-ratio or single factor capital frameworks. 

Keywords: Stablecoins, deposit tokens, tokenized cash, capital buffer, leverage ratio, financial stability