Group items tagged

"Recent news reports have shone a light on Binance-Peg BUSD ("PBUSD") and how it doesn't always appear to have been completely backed by BUSD issued by Paxos. PBUSD is minted on several blockchain networks including BNB Chain, Avalanche, Polygon, and TRON. PBUSD has always been, and continues to be, 100% collateralized. However, the collateral has not always been stored in a single, dedicated wallet in real time so that the 1:1 backing was not always immediately visible to users. Binance undertook a project to centralize the collateral in a single, dedicated wallet; this was completed on 04 January 2023 so that users have visibility into the 1:1 backing of PBUSD. Minting of PBUSD now only takes place after collateral is added to the dedicated wallet. Centralization of collateral for all Binance-backed tokens into dedicated collateral wallets will be completed by 09 February. This will be visible in the Proof of Reserves system that we are continuing to develop."

The International Swaps and Derivatives Association (ISDA) published a jurisdiction-agnostic guidance note to inform how counsel may approach a legal opinion on the enforceability of collateral arrangements entered into under certain ISDA collateral documentation where the relevant collateral arrangement comprises tokenized securities and/or stablecoins. This guidance note sets forth (i) a basic taxonomy of common tokenization structures and (ii) a non-exhaustive list of key issues to consider when analyzing the enforceability of collateral arrangements involving tokenized collateral.

"In this paper, we study the mechanisms that govern price stability of MakerDAO's DAI token, the first decentralized stablecoin. DAI works through a set of autonomous smart contracts, in which users deposit cryptocurrency collateral, typically Ethereum, and borrow a fraction of their positions as DAI tokens. Using data on the universe of collateralized debt positions, we show that DAI price covaries negatively with returns to risky collateral. The peg-price volatility is related to collateral risk, while the stability rate has little ability to stabilize the coin. The introduction of safe collateral types has led to an increase in peg stability."

Dai is minted by users taking on collateralized debt positions, where collateral is deposited in an Ethereum smart-contract, with a percentage of the asset's value being paid out in Dai. The collateral then gets released once the tokens are repaid, and the Dai are destroyed. Loans that can't be supported by their collateral are placed into liquidation proceedings, in which the collateral is auctioned for Dai to repay the debt. But the price drop allowed bidders to win liquidation auctions for 0 DAI - further worsening Maker's crisis.

JPMorgan Chase & Co is using blockchain for collateral settlements. The bank's first such transaction came on May 20, when two of its entities transferred the token representation of BlackRock money market fund shares as collateral on its private blockchain. The effort will allow investors to pledge a wider range of assets as collateral and use them outside of market operating hours... In the coming months, the bank plans to expand tokenized collaterals to include equities, fixed income and other asset types.

The International Swaps and Derivatives Association (ISDA) has updated an annex to its master derivatives agreement to support the use of tokenized collateral. The Tokenized Collateral Model Provisions do not purport, and should not be considered, to address all issues and considerations that may be relevant in connection to the transfer or receipt of Tokenized Collateral, including, without limitation, enforceability, regulatory, tax and accounting issues and considerations.

ISDA analysis indicates that netting arrangements relating to digital asset derivatives are likely to be enforceable in certain major jurisdictions (including England and Wales and New York). However, the enforceability of netting in each jurisdiction will depend on the counterparty's local insolvency law, some of which may exclude or omit digital assets from their scope of application. ISDA will therefore begin work in 2023 to update netting opinions in relevant jurisdictions to cover digital assets. When it comes to collateral, it is likely that most (if not all) developed jurisdictions will recognize digital assets as property that will be capable of protection under local law, including for posting as collateral. However, the precise nature and extent of any rights associated with that property interest, the strength of legal certainty and certain technical issues, such as the methods by which that property can be posted as enforceable collateral, will vary based on the applicable jurisdiction(s).

The Deutsche Bundesbank and Deutsche Börse have presented the results of a concept study on the use of distributed ledger technology (DLT) in the area of collateral management. This study outlines that, in principle, DLT is capable of delivering further benefits in terms of the velocity and usability of collateral. The two institutions are thus continuing their successful cooperation in researching the capabilities offered by securities settlement based on DLT technology.

"In the IMF working paper, called Privacy provision, payment latency and role of collateral, authors Charles Kahn, Caitlin Long and Manmohan Singh argue that digital currencies are analogous to collateral reuse, where securities are exchanged for cash. Looked at this way, central bank digital currencies (CBDCs) and commercial-bank sponsored tokens may be preferable to stablecoins, such as libra, which are issued by private companies without bank charters. "

JPMorgan has debuted its in-house blockchain-based tokenization application, the Tokenized Collateral Network (TCN) as it settled its first trade for BlackRock. The TCN, using blockchain technology, allows investors to transfer collateral ownership without moving assets in underlying ledgers. It was used by BlackRock to turn shares in one of its money market funds into digital tokens, which were then transferred to Barclays as collateral for an over-the-counter derivatives trade between the two institutions.

This paper gathers various stablecoin price stabilization mechanisms, dividing the methods into four collateral types (fiat, crypto, commodity, and non-collateralized) and two layers (protocol and application) to show that non-collateralized stablecoin on the application layer is the simplest approach for implementation.

MakerDAO is now allowing the centralized USDC stablecoin to be used as collateral for loans after last week's ethereum crash. The platform was left with under-collateralized debt worth millions of dollars after ether (ETH) fell by 30% in 24 hours on "Black Thursday."

The worry is that in dispensing with collateral as a line of defense (or using less of it), the new breed of less-than-fully collateralized stablecoins may not be able to weather a major black swan event, say like a market crash, an outbreak of war or a new pandemic. It's possible that less-than-fully collateralized stablecoins will prove to be an enduring advance in financial technology. If so, they'll imbue DeFi with true stability while simultaneously disconnecting it from the incumbent financial system. Or they could be highly risky assets that offer only the illusion of safety. We'll know which it is when the next big market disruption hits.

"We develop a dynamic model of stablecoins and crypto shadow banking, where the stablecoin issuer transforms risky assets, including cryptocurrencies, into digital tokens of stable values. Both the stablecoin issuer's reserve assets and users' collateral back the stablecoin. However, even under over-collateralization, a pledge of one-to-one convertibility to a reference currency can be fragile. The distribution of states is bimodal: A fixed exchange rate may persist, but once the stablecoin breaks the buck, the recovery is slow. When negative shocks drain the issuer's reserves, debasement allows the issuer to share risk with users, but it triggers a vicious cycle of depressed stablecoin demand, lower transaction volume and transaction fees, slow rebuild of reserves, and a persistent need for debasement. Stablecoin management requires the optimal combination of strategies commonly observed in practice, such as open market operations, dynamic requirement of users' collateral, transaction fees or subsidies, re-pegging, and issuances of ``secondary units'' that function as the stablecoin issuer's equity. Our model lends itself to an evaluation of regulatory proposals (e.g., capital requirement) and sheds light on the complex incentives behind the stablecoin initiatives led by the network companies (e.g., Facebook)."

"The release of Multi-Collateral Dai (MCD) is only 10 days away and will mark a huge milestone reached for the MakerDAO project. MCD will introduce exciting new features to the Maker Protocol, including the much-anticipated Dai Savings Rate (DSR) and, of course, additional collateral asset types. "

The MakerDAO project launches its upgraded multi-collateral Dai stablecoin today. To the relief of many, it will not include traditional assets as accepted forms of collateral just yet. Cryptocurrency Exchange, Coinbase, has already announced support for the upgraded token from 2nd December.

MakerDAO's latest spike comes amid a community vote showing strong support for supporting non-crypto-native assets as collateral for the creation of DAI. Currently, MakerDAO users can lock up Ether, Wrapped Bitcoin, Basic Attention Tokens, or the stablecoin USD Coin to fund DAI loans. The vote signaled support for a protocol developed by blockchain startup Centrifuge that would allow "real-world assets" to be tokenized as ERC-20-based securities that can be used as collateral for DAI minting.

Maker (MKR) holders have voted to prioritize adding Gemini USD, Binance USD, and several other tokens as collateral assets to the Maker DAO protocol so those tokens can be used to generate DAI stablecoins. As a result, Maker "Domain Teams"-elected community members-will analyze these tokens and determine whether or not the protocol can handle them before the community takes a final vote to accept or reject them as collateral assets.

Collateral is used in debt contracts to mitigate the difficulties ("agency problems") that arise when the lender's knowledge of the borrower is incomplete ("asymmetric information"). Banks usually require borrowers to pledge tangible assets, such as real estate, to help offset such problems in credit assessment, or to reduce moral hazard and enforcement problems. By contrast, large technology firms ("big techs") can use massive amounts of data ("big data") to better assess firms' creditworthiness. These capabilities could help to reduce the importance of collateral in solving asymmetric information problems in credit markets.

A Bank for International Settlements (BIS) working paper suggests that use of massive amounts of data by large technology firms (big techs) to assess firms' creditworthiness could reduce the need for collateral in credit markets. Using a unique dataset of more than 2 million Chinese firms that received credit from both an important big tech firm (Ant Group) and traditional commercial banks, the paper finds that a greater use of big tech credit, granted on the basis of machine learning and big data, could reduce the importance of collateral and potentially weaken the financial accelerator mechanism. https://www.bis.org/publ/work881.htm