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The story of stablecoins is the story of Ethereum. Driven by a global flight to safety amidst the coronavirus pandemic, stablecoin issuance ballooned over $8 billion in the first quarter of 2020. While inter-exchange settlement remains the most dominant use case for stablecoins by far, more generally, stablecoins are simply a better means of storing and moving dollars around the world. 24/7 uptime and relatively quick settlement allows users to react to market conditions much faster than when dealing with traditional payment rails. https://twitter.com/RyanWatkins_

Facebook's digital wallet, Novi, could abandon the Diem stablecoin in favor of fiat money if regulators do not change their tune, says David Marcus, head of Facebook Financial and Novi. The current iteration of the project involves the issue of a single stablecoin pegged to the US dollar, versus the original plan to issue a series of stablecoins backed by individual traditional currencies, as well as a token based on the currency-pegged stablecoins. Marcus claims that US authorities' "hostility" to Facebook's move into payments, is "profoundly un-American" and that the firm deserve a "fair shot" while also pointing out that it is already well embedded in the sector.

Terra's U.S. dollar-pegged stablecoin UST is now the #4 stablecoin on the market (about $9 billion) but it's very different from the three that sit above it. Tether's USDT ($77 billion), USD Coin's USDC ($42 billion) and Binance's BUSD ($15 billion) are run and managed by centralized entities, and the assets that back them (reportedly 1:1) are also centralized. However, UST is a decentralized stablecoin backed by other cryptocurrencies. Terra itself is a layer 1 smart contract-enabled network built using the Cosmos software developer kit, and UST is minted by users by "burning" (destroying) LUNA, Terra's native token responsible for paying transaction fees and participating in governance. DAI, the #5 stablecoin (just under $9 billion), is also cryptocurrency backed.

"In May 2022, there was a run on Terra, an algorithmic stablecoin whose price broke its peg of $1 and crashed to zero. The run spilled over to the entire stablecoin sector, with stablecoins backed by riskier assets heavily affected and investors fleeing to less risky U.S.-based stablecoins regulated by U.S. authorities. As the digital asset ecosystem continues to grow, its potential to affect traditional financial markets and a broader section of households and firms could grow accordingly."

Binance is exploring issuing stablecoins on the "Progmat Coin" tokenization platform founded by Mitsubishi UFJ Trust and Banking Corporation (MUFG). The Progmat Coin platform allows for transfers and exchanges of stablecoins on various blockchains, including public permissionless blockchains such as Ethereum, in accordance with Japan's revised Payments Services Act enforced in June 2023. For such stablecoins, issuers and intermediaries are required to take measures to prevent a transfer of such stablecoins to customers whose identity has not been verified, even though I assume they're not responsible for off-platform transfers between customers.

The Brookings Institution published a paper that proposes a US federal framework for the issuance of stablecoins within the existing regulatory framework for insured depository institutions, a structure that would not require any new legislation. Under current law, the Comptroller of the Currency could authorize a national trust bank charter, organized as an operating subsidiary of an insured depository institution, to create stablecoins through the use of a dedicated trust vehicle. The Comptroller would adopt standards limiting the investment of stablecoin reserves to high quality liquid assets and address redemptions and operational resilience, among other matters. The proposed framework guarantees that holders of a failed stablecoin are paid out rapidly and in full, because it uses the same resolution process by which failed banks are wound up.

The National Australia Bank (NAB) aims to launch an Australian dollar-pegged stablecoin (AUDN) in the middle of 2023. Its purpose would be to allow its customers to settle transactions in real-time using Australian dollars, and several other purposes including "carbon credit trading, overseas money transfers and repurchase agreements." The stablecoin will launch on the Ethereum and Algorand blockchains. NAB is the second major Australian bank to be involved in the creation of a stablecoin. Earlier, Australia and New Zealand Banking Group (ANZ) teamed up with crypto custodian Fireblocks to mint a stablecoin pegged to the Australian dollar.

Binance will stop supporting trading in spot pairs that include these stablecoins, but will allow users to withdraw funds in the form of these stablecoins. In other words, the trading of these stablecoins will no longer be supported, but Binance users will be able to withdraw amounts denominated in these stablecoins.

Mitsubishi UFJ Financial Group (MUFG) plans to deploy and distribute bank-backed stablecoins on different public blockchains. The Japanese bank has partnered with Datachain, a blockchain interoperability company, and Toki, a cross-chain bridge, to allow the interoperation of these licensed stablecoins along several blockchains using its Progmat Coin protocol. The announcement comes after Japan's revised funds' settlement law passed in 2022 came into take effect to allow financial institutions to issue stablecoins. Stablecoin issuance on public blockchains doesn't seem to be explicitly covered in the legislation as summarized in a slide deck from Japan's Financial Services Agency (FSA) and this document, although a white paper published by the country's Liberal Democratic Party implies that clarity on this issue would be forthcoming, which I suppose has indeed arrived.

"The new stablecoin using the Bitcoin blockchain was created by Stably, a Delaware-based startup. The dollar-pegged stablecoin is called #USD, and it takes the most fundamental unit of Bitcoin, called a 'satoshi' or 'sat' for short, and turns those smaller units into tokens that represent a claim against US dollars held by a custodian. It is the first stablecoin that is native to the Bitcoin blockchain, whereas others, like Rootstock or Sovryn, offer Bitcoin-collateralized stablecoins on layer two architectures."

Legislation to regulate stablecoins being drafted in the U.S. House of Representatives would place a two-year ban on coins similar to TerraUSD, the algorithmic stablecoin that collapsed earlier this year. It would be illegal to issue or create new "endogenously collateralized stablecoins." The definition would kick in for stablecoins marketed as being able to be converted, redeemed or repurchased for a fixed amount of monetary value, and that rely solely on the value of another digital asset from the same creator to maintain their fixed price.

The American Institute of Certified Public Accountants (AICPA) published proposed criteria for stablecoin issuers when they disclose their proof of reserves. It asks for more details than any stablecoin issuers currently provide in their disclosures. For example, the call for issuers to disclose the banks where they hold cash, the amount of redeemable stablecoins on each blockchain, and details about tokens that are not redeemable, either temporarily or permanently (e.g., pre-minted or blacklisted tokens). Plus proof of reserves will need to disclose the conditions required to redeem the stablecoin directly.

The Banque de France (BdF) published a paper that examines the impact of stablecoin issuer investment practices on the financing of the real economy. The largest stablecoins manage their peg with the US dollar (USD) by holding short-term safe assets, including USD-denominated commercial paper (CP). The analysis shows that CP issuers catered to the additional demand from stablecoins by issuing more, illustrating the implications of stablecoins for financial stability and the financing of the real economy.

"Let's take a look at one of the biggest stablecoins in crypto, the USDC token. Using a few specific examples, we will show: (1) stablecoins are regularly used by dubious actors to move massive sums of money internationally with minimal oversight, (2) stablecoins are regularly used in fraudulent transactions, and (3) stablecoin issuers provide shadow banking services for other crypto entities that are unable to access traditional banking services. "

"There have been some slight fluctuations in USDD's price at the start of the new year, as the stablecoin has dipped to the 97-cent range on a few occasions in 2023. After Terra's stablecoin depegging event in May 2022, USDD started to slip slightly below the $1 peg, causing anxiety in the crypto industry. A number of other stablecoins saw similar deviations. On June 19, 2022, USDD reached a low of 92.8 cents per unit, but the stablecoin managed to regain the $1 peg, trading between 98 cents and 99 cents per unit."

The U.S. Federal Reserve (Fed) published a paper that explored the March 2023 USDC stablecoin depeg as a means to learn more about the complexities of stablecoin markets, with an emphasis on distinguishing between primary and secondary market dynamics during a stablecoin crisis. In the end, the analysis, which compared the market dynamics of the four largest stablecoins by market capitalization (USDT, USDC, BUSD and DAI), found more questions than answers, and called for additional theoretical and empirical investigation.

This Bank of Canada paper proposes a three-step framework to assess the risks of stablecoin arrangements. It is designed to allows authorities to understand the defining characteristics of stablecoin arrangements, to be specific about any concerns they may have, and to be objective in their treatment from issuer to issuer. First, the framework classifies the stablecoin arrangement into three parts, coin structure, related transfer system(s) and related financial service(s), and then categorizes the attributes of each one. Secondly, it identifyies specific risk scenarios that are relevant to the stablecoin arrangement, and thirdly, it quantifies the range of probable loss and possible frequency associated with the identified risk scenarios.

U.S. Treasury Secretary Janet Yellen convened the President's Working Group on Financial Markets (PWG), joined by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to discuss stablecoins. In the meeting, participants discussed the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security. The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place. The group also heard a presentation from Treasury staff on the preparation of a report on stablecoins, which would discuss their potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations for addressing any regulatory gaps. The PWG expects to issue recommendations in the coming months.

"A global stablecoin network, if poorly designed and unregulated, could pose risks to financial stability. The failure of a stablecoin to operate as expected could disrupt other parts of the financial system. For example, the inability to convert stablecoins into domestic currency on demand or to settle payments on time could create credit and liquidity dislocations in the economy. If a stablecoin's credit, liquidity, market, and operational risks are managed ineffectively, it could face a loss of confidence. This loss of confidence could lead to a run, where many holders attempt to liquidate their stablecoins at the same time. In an extreme scenario, holders may be unable to do so, with potentially severe consequences for domestic or international economic activity, asset prices, or financial stability."

The US President's Working Group on Financial Markets (PWG) released a report on stablecoins. It concluded that "the absence of appropriate [stablecoin] oversight presents risks to users and the broader system... and current oversight is inconsistent and fragmented, with some stablecoins effectively falling outside the regulatory perimeter. It called on Congress to create legislation to "require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level."