Stablecoin Self-Regulation (SSRN)

The paper “Stablecoin Self-Regulation” by Federal Reserve Board (FRB) Principal Economist Francesca Carapella proposes a self-enforcing, market-based alternative to traditional regulation for addressing the fragility of stablecoin issuers. It models an economy where stablecoins and banks coexist, both facing limited commitment to redeem liabilities. To mitigate this, the author introduces a voluntary, two-part mechanism: (1) a loss mutualization fund and (2) costly one-period membership titles that issuers must purchase to insure their obligations. This structure aligns with how central counterparties (CCPs) manage risk. The paper finds that this self-regulatory approach can improve financial stability more effectively than current legislative proposals, which often ignore the indirect impact of regulation on traditional financial institutions and lack key disciplining features. Notably, integrating stablecoin issuers under bank regulation may reduce banks’ incentive to offer insured deposits, potentially increasing systemic risk. [Download the paper at SSRN]

Designing the Future of Money: The Case for Multiple CBDCs (BRC)

Banco de la República Colombia (BRC) published a paper that explores how central banks can optimize the design of central bank digital currencies (CBDCs) by introducing multiple variants with varying degrees of anonymity and interest rates. The authors examine the trade-offs between anonymity and security and assess the welfare outcomes in economies with and without cash. They find that when anonymity-related externalities (e.g., illicit activity) are high, a cashless society with multiple optimally designed CBDCs maximizes welfare. Even when anonymity costs are absent, a cashless system with one additional CBDC still outperforms systems retaining cash. The study emphasizes the flexibility of multiple CBDCs in tailoring monetary instruments to diverse user preferences while minimizing societal costs, and argues that careful CBDC design can enhance financial stability and efficiency more effectively than static cash-based systems. [Read more at the BRC]

Upcoming Speaking Engagements:

The CB+DC Conference (Nassau, Bahamas, September 9-11) is a premier gathering centered on CBDCs, tokenized assets, and stablecoins. It provides a forum for central bankers, commercial bankers, technology innovators, policymakers, and academics to explore the latest advancements in digital currency, engage with experts and peers, and discuss the future of digital currency. [Register here but before you do, email me at john@kiffmeister.com for a 15% discount]

And just a reminder that I produce a monthly digest of central bank digital currency (CBDC) developments exclusively for the official sector. So (only) if you work at a central bank, ministry of finance or international financial institution (e.g., the BIS, IMF, OECD, World Bank) and who would like to receive it by email on the first business day of every month, please DM me on LinkedIn or email me at john@kiffmeister.com.