The latest BIS paper on stablecoins delves into historical data, trying to establish whether or not they are stable and which types are less volatile. The title, “Will the real stablecoin please stand up?” is perhaps a giveaway about its conclusion – stablecoins struggle to keep their pegs.
Rather than purely focusing on the handful of larger stablecoins, it explores a more diverse range of 68 tokens. It found that more mature stablecoins are less volatile.
Across a period of almost five years, fiat backed stablecoins kept their peg 94% of the time, crypto backed 77% and commodity (gold) backed 50% of the days. Just seven out of the 68 stablecoins maintained the peg deviation to within 1% for more than 97% of their life span. Tether and USD Coin are included in the seven.
The underlying fiat currency peg also impacts volatility. So stablecoins denominated in dollars and euros were more stable versus the rupiah, Singapore dollar or Turkish lira.
The authors question whether intraday fluctuations in stablecoin prices make the stablecoin an appropriate means of payment. Intraday peg deviations happen the most often for commodity (gold) backed stablecoins, likely because of the time lag between buying and selling commodities.
Crypto backed stablecoins had the smallest intraday deviations. The authors are loathe to interpret this because of limited data. However, we’d speculate that’s because crypto is a native asset, and crypto backed stablecoins tend to be over collateralized.
Turning to reserve backing, the BIS observes differences in the types of asset backing and a vast disparity in reserve reporting. For some stablecoins, including the third largest TrueUSD, the asset “type or maturity are either difficult to classify (eg secured loans) or not published at all.” There’s been much conjecture about whether or not Justin Sun acquired TrueUSD
Stablecoin usage and the alternatives
Regarding stablecoin usage, it concludes the primary purpose is for settling crypto trades and for DeFi liquidity. It notes that use as a foreign inflation hedge in some jurisdictions is anecdotal.
Just over a week ago, another BIS paper on stablecoins stated that “In order to address these challenges, the regulation, supervision and oversight of SAs (stablecoin arrangements) alone may not be sufficient to mitigate such risks.” Today’s paper repeats that. Additionally, when it comes to mainstream payments, it implies the answer is to provide alternative solutions to address stablecoin’s claimed benefits.
For example, one stablecoin benefit is making cheap cross border payments. Hence further linkages between faster payment systems should be encouraged. If programmability and instant settlement are attractive, CBDCs could provide this.
It strongly encourages jurisdictions to move quickly in implementing policy and regulation.
On that point, we’d note two recent proposals. In the UK, large stablecoins will have to keep reserve assets at the Bank of England. And the Bank of England won’t pay them interest. In contrast, in the EU large stablecoins must deposit at least 60% at commercial banks, but they have to spread out the deposits. That’s two very different approaches.
