Stablecoin Runs and the Centralization of Arbitrage (NBER)
The U.S. National Bureau of Economic Research (NBER) published a paper that investigates the trade-off between price stability and run risk in stablecoins, focusing on the role of arbitrage concentration. It document that stablecoin issuers, such as Tether (USDT), limit the number of arbitrageurs who can redeem stablecoins for cash, leading to concentrated arbitrage. They argue that while more efficient arbitrage improves price stability by reducing secondary market price deviations, it also increases run risk by lowering the price impact of investor sales, thereby encouraging panic selling. The study develops a theoretical model showing how issuers balance these trade-offs and analyzes policy implications, such as the unintended consequences of regulations promoting unconstrained redemptions. The findings highlight the need for coordinated policies addressing both arbitrage efficiency and reserve asset liquidity to mitigate systemic risks in the stablecoin ecosystem. [Read more at the NBER]
What is the Future of Stablecoins and How Do We Get There? (KCL)
Kings College London (KCL) Business School published a paper that explores the future of stablecoins and outlines key dimensions for their sustainable growth and adoption. It emphasizes the need for a standardized approach across seven critical areas: monetary policy (minting/burning, reserve tracking), reserve asset verification, compliance (identity, regulatory rules), interoperability (cross-chain functionality), privacy (confidential transactions), fees and yield generation (business models), and roles/events (governance and transparency). The author argues that while some aspects, like mint/burn functions, are mature enough for standardization, others, such as privacy and compliance, require further industry consensus. The paper highlights the importance of transparency in reserve assets, the potential for yield-bearing stablecoins despite regulatory skepticism, and the role of interoperability protocols like Chainlink CCIP. Ultimately, it calls for coordinated development to avoid fragmentation and ensure stablecoins can fulfill their promise as a foundational element of on-chain finance. [Read more at the KCL Business School]
CBDC and Bank Stability: Does Monetary Policy Play a Moderating Role? (ADBI)
The Asian Development Bank Institute (ADBI) published a paper that examines the impact of central bank digital currency (CBDC) adoption on bank stability in India and China, using a “benefit-of-the-doubt” approach to construct a multidimensional Bank Stability Index (BSI). The index is based on 2013-2022 data from 74 banks across five dimensions; capital adequacy, profitability, asset quality, liquidity, and efficiency. The study finds that CBDC adoption positively affects bank stability, with a stronger impact in India compared to China. The study also reveals a negative moderating role of monetary policy, suggesting that the stabilizing effect of CBDC is enhanced during accommodative monetary policy stances, and diminished when policy is tight. The research concludes that careful management of CBDC alongside appropriate monetary policy can enhance overall financial stability. [Read more at the ADBI]
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.
