"Cash can co-exist with cards and apps, and when kept in balance, the different forms of payment can complement each other. It's only when that balance is removed that the dark side of digital payments gets to flourish. Unfortunately, across the world we're seeing the spread of so-called 'cashlessness', a type of contagion in which the option to pay with non-corporate and non-automated money is incrementally taken away from you. The fight against cashless society, then, is a fight against a state of unbalance. I've campaigned on this for eight years now, and in this piece I'll lay out 10 talking points that you can use to make even the most ardent card-tapper have second thoughts about a totally bank-dominated society."
"If not its beating heart, China Evergrande Group, with its countless development subsidiaries, is at least the distended central vein of the Chinese financial system. A voluminous channel through which flows so much of the capital with which the central government force-feeds the economy, the heavily indebted group is now seeing its shares slide and its assets frozen by regulators. The question: Will it finally fail?"
An IMF blog post reports that amid greater adoption, the correlation of crypto-assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits and raises the risk of contagion across financial markets, according to new IMF research.
Amid growing concerns over centralized cryptocurrency exchanges in the wake of the FTX crisis, investors are increasingly moving to hardware crypto wallets. Hardware wallet provider, Trezor, saw its sales revenue surge 300% week-on-week and it's still growing in the aftermath of the FTX debacle. Ledger, a major rival hardware wallet supplier, has also recorded a significant surge in demand for its devices recently as well. And now even some of the biggest crypto exchanges have started promoting the need for self-custody. Binance CEO Changpeng Zhao admitted on November 14 that centralized exchanges may no longer be necessary as investors would shift to self-custodial solutions like hardware or software wallets.
The International Monetary Fund (IMF) published a Fintech Note that provides key elements that should feature in any stablecoin regulatory arrangement. Stablecoins have experienced periods of rapid growth, accelerated links with traditional finance. Without proper regulation, contagion risks to wider financial sector will increase. Global regulation for stablecoins should be comprehensive, consistent, risk-based, flexible, and focus on their structural features and use. Requirements on stablecoins should cover the entire ecosystem and all its key functions, and there should be additional oversight for systemic stablecoin arrangements. In markets where risks are growing quickly, authorities should take immediate action by using all the tools at their disposal. For effective implementation, domestic and international collaboration are key.
"How does stablecoin design affect market behavior during turbulent periods? Stablecoins attempt to maintain a "stable" peg to the US dollar, but do so with widely varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and the linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing a fall in value and others gaining value. Using a Baba, Engle, Kraft and Kroner (1990) (BEKK) model, we examine the reaction to this exogenous shock and find significant contagion effects from the UST collapse, likely partially due to herding behavior among traders. We test the varying reactions among stablecoins and find that stablecoin design differences affect the direction, magnitude, and duration of the response to shocks. We discuss the implications for stablecoin developers, exchanges, traders, and regulators."
"Currently, there is no overarching regulatory framework for stablecoins in Canada, and no authority has asserted jurisdiction over the operations of their issuers. This article is the first scholarly work to provide a detailed assessment of the jurisdictional perimeter, and risk-informed regulatory design principles, for fiat-backed stablecoins in Canada. It provides two unique and vital contributions to policy formation in stablecoin regulation. First, it analyzes whether stablecoins are securities, investment funds, or derivatives based on statutory definitions and interpretive jurisprudence. Second, it assesses whether a securities-based regulatory framework is sufficient to mitigate the risks that stablecoins pose, or if it leaves gaps that must be filled by banking, payments, and systemic risk regulators. While securities authorities have a reasonable case for legal jurisdiction over stablecoins based on how they are currently used, there are several "gaps" if stablecoins are exclusively regulated under securities law, and while many protections are provided, the full breadth of risks will not be mitigated. If Canadian securities regulators move forward with a stablecoin policy framework, they must do so with an eye to resulting gaps. Ultimately, a comprehensive framework will require inter-agency cooperation, across the financial regulatory landscape, to adequately address all stablecoin risks. It must apply "same risk, same regulation" principles, contextualized to support innovation, financial inclusion, and competition, using tiered parameters, and parallel and complementary inter-agency oversight. It must seek international regulatory cooperation, data-sharing, and contemplate contagion, interconnection, and the consequences of the potential failure of a global stablecoin issuer."
This European Central Bank (ECB) article analyses the role played by stablecoins within the wider crypto-asset ecosystem and finds that some existing stablecoins are already critical to liquidity in crypto-asset markets. This could have wide-ranging implications for crypto-asset markets if a large stablecoin were to fail and could also have contagion effects if crypto-assets' interlinkages with the traditional financial system continue rising. The article calls for the urgent implementation of effective regulatory, supervisory and oversight frameworks before significant further interconnectedness with the traditional financial system occurs.
Among one of the most significant firms entangled in the FTX collapse is the Digital Currency Group, whose subsidiaries include Genesis, Grayscale, CoinDesk, Foundry, and other companies. Genesis, in particular, is under the spotlight because, as an institutional lender, they may have extended capital to entities embroiled with the FTX/Alameda collapse. Genesis has at least $175M stuck on FTX, and also had large exposure including unsecured loans to Three Arrows Capital (3AC) before it collapsed in June. On November 16th, Genesis halted withdrawals and new loan originations following FTX's fall... Genesis connects institutional investors to digital asset markets allowing them to trade, borrow, hedge and more. Genesis is heavily used throughout the industry, including by centralized exchanges like Gemini for their "earn" program which allows customers to earn yield off of their holdings. Last week, Gemini Earn halted withdrawals after Genesis halted withdrawals... Also, Genesis's lending arm, which is widely integrated into various services that offer yield on crypto, may have been affected by offering loans that FTX or Alameda will not repay. DCG has been allegedly looking to raise capital, up to $1B, with little interest from investors balking at a previously undisclosed $1.1B loan from DCG to Genesis, with Grayscale being the only assets receiving any meaningful interest.
The Hong Kong Monetary Authority (HKMA) published a paper on volatility spillover from asset-backed stablecoins to money market instruments, focusing on Tether. Stablecoins bear liquidity mismatch risks similar to money market funds, which may expose them to a fire-sale of reserve assets in times of crypto ecosystem instability and in turn increase the volatility of these reserve assets. It finds that, in extreme circumstances, these fire-sales could have material impacts on the traditional financial system such as the money market. The paper proposes regulations that require stablecoin issuers to provide standardized and regular disclosures of their reserve assets holdings, and possibly imposing restrictions on the composition of reserve assets and requiring well- defined redemption rights
"Crypto lender BlockFi filed for bankruptcy protection Monday, days after suspending withdrawals amid the ongoing fallout from exchange FTX's bankruptcy filing."
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