Bank for International Settlements (BIS) Study
A recent study released by the Bank for International Settlements (BIS) highlighted the lack of critical mechanisms that guarantee money market stability in fiat in the case of stablecoins. The study implies that the operational model of a monetary authority would be superior to private stablecoin due to the regulatory control it can provide. The authors used a “money view” of stablecoin and an analogy with onshore and offshore USD settlement to probe the weaknesses of stablecoin settlement mechanisms. The study likewise pointed out the importance of monetary authority credit in maintaining stability in worldwide dollar settlement and provided examples from the financial crisis of the late 2000s. The study highlighted the dependence of stablecoins on maintaining par between themselves and the challenges they face with blockchain bridges and higher interest rates.
Regulated Liability Network Solution
The study proposed the Regulated Liability Network as a model solution to the difficulties faced by stablecoins. In this model, all states are settled on a single ledger inside a regulatory perimeter, involving a fully-fledged banking system that includes the monetary authority. This system would provide the credibility that private cryptocurrency stablecoins as of now lack.
Increased Attention and Legislative Focus
The BIS has been paying increased attention to stablecoins, as shown by its recent study and the growing legislative focus on stablecoin regulation in the European Union, United Kingdom, and United States. This attention reflects the increasing role of stablecoins in finance.
Hot Take
Overall, the BIS study sheds light on the limitations of stablecoins and offers a solution through the Regulated Liability Network model. With increasing regulatory focus, stablecoins may need to evolve to meet the requirements of a stable and credible financial system.
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