Here is our pick of the 3 most important stablecoin stories during the week.
What a year 2022 has been!
As this is my last post for the year, I have picked stories that seem to sum up what has been a wild 2022.
Firstly, in stablecoins we had a number, in particular Algo stablecoins lose their peg.
In the case of USTC, for example, the Terraform Labs ecosystem had flaws that allowed the exploitation of arbitrage opportunities due to the low liquidity of Curve (CRV) that underpinned the stablecoin’s parity.
Also, in May, the DeFi Anchor project, a protocol that allowed users to deposit USTC to earn rewards, reduced its yield from 20% to just 4%. This took many investors by surprise, and they decided to take UST out of Anchor and sell it on the market.
Another stablecoin fell apart this week, once again an Algo. The token of the decentralized application (DApp) creation platform Waves (WAVES) is plummeting after the algorithmic stablecoin backing it failed to maintain its peg to the US dollar.
And then as almost as if it was trying to bring some order to all this chaos the BIS have endorsed a finalised prudential standard on banks crypto asset exposures which will provide guidance and hence make it more likely that mainstream TradFi will dip its toes into Crypto. Some quick takeaways;
- Group 1 cryptoassets. Those that meet in full a set of classification conditions. Group 1 cryptoassets include #tokenised traditional assets (Group 1a) & #cryptoassets with effective stabilisation mechanisms (Group 1b). Group 1 cryptoassets are subject to capital requirements based on the risk weights of underlying exposures as set out in the existing #Basel Framework.
- Group 2 cryptoassets. Those that fail to meet any of the classification conditions. As a result, they pose additional & higher risks compared with Group 1 cryptoassets and consequently are subject to a newly prescribed conservative #capital treatment. In addition to any tokenised traditional assets & #stablecoins that fail the classification conditions, Group 2 includes all unbacked cryptoassets. A set of hedging recognition criteria is used to identify those Group 2 cryptoassets where a limited degree of #hedging is permitted to be recognised (Group 2a) and those where hedging is not recognised (Group 2b).
Additional key elements of the standard include:
- Infrastructure risk add-on: An add-on to risk-weighted assets (#RWA) to cover #infrastructure risk for all Group 1 cryptoassets that authorities can activate based on any observed weaknesses in the infrastructure on which cryptoassets are based.
- Redemption risk test and a supervision/regulation requirement: This test & requirement must be met for stablecoins to be eligible for inclusion in Group 1. They seek to ensure that only stablecoins issued by #supervised & #regulated entities that have robust redemption rights and governance are eligible for inclusion.
- Group 2 exposure limit: A bank’s total exposure to Group 2 cryptoassets must not exceed 2% of the bank’s Tier 1 capital and should generally be lower than 1%.
- Other elements of the standard include descriptions of how the operational risk, liquidity, leverage ratio & large exposures requirements should be applied to banks’ cryptoasset exposures.
And our final story, is a bonus fourth article, that focuses us on what this novel invention is all about – the technology. Credit Suisse, Pictet and Vontobel have conducted a proof of concept to issue tokenized investment products recorded on a public blockchain and traded on BX Swiss, the Swiss regulated stock exchange. The three processes of the proof of concept – issuance, trading and settlement – took place within hours, whereas in a traditional financial environment they take days.
So in summary, as the world of stablecoins and CBDC’s staggered thru the year, while the broader Crypto world descended into chaos and we all look forward to a break, recharge the batteries and get to do it again next year, remember the technology, it is novel, it is efficient and it brings powerful advantages over the existing system.
Happy festive seasonal wishes to everyone!
Alan Scott is an expert in the FX market and has been working in the domain of stablecoins for many years.
We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information.