Stablecoins could provide market participants with a cost-effective means of balancing their capital in the world’s wild markets. In the last year, three major financial supervisory bodies have expressed concern about the threats to financial stability allegedly posed by stablecoins.
While recognizing the potential for increasing the efficiency of payments According to reports from the Bank for International Settlements, the United States Federal Reserve and, more recently, the Financial Stability Board, many risks are highlighted under the banner of „financial stability“.
The concern is with global stablecoins, which they define as having „potential reach and adoption across multiple jurisdictions and the potential to achieve substantial volume. The ESB report included a glossary of definitions of key terms, although none were provided for „financial stability“.
Why will stablecoins be crucial for the future?
What does financial stability mean?
The simplest way to conceive of financial stability is as an absence of instability. The global financial crisis of 2007-2008 marked the epitome of modern financial instability.
It was in response to this crisis that the G-20 leaders established the Financial Stability Board in 2009. Hosted and funded by the BIS, it oversees the global financial system, coordinating the work of national financial authorities and other global bodies.
Its stated objective is „to address vulnerabilities affecting financial systems in the interests of global financial stability“. Preventing another event similar to the 2008 financial crisis is presumably the main purpose of this body.
The 2008 financial crisis
The 2008 financial crisis is best explained as the inevitable result of a prolonged failure to discover prices in the residential mortgage credit markets. Because, by then, sub-prime mortgage securities were worthless, according to their analysis, and yet they were rated AAA.
Despite being the best positioned to perform credit analysis. Mortgage originators had strong financial incentives to turn a blind eye. Despite having the strongest financial incentives to perform credit analyses, investors in sub-prime mortgages were in an impossible position to do so.
Thus, the pricing mechanism in this market was totally inhibited by a widespread blind confidence in AAA ratings.
As demand for high-yield sub-prime securities grew enormously without regard to the creditworthiness of residential borrowers, a painful „repricing“ of these assets became inevitable.
The antidote to systemic financial risk is to facilitate and maintain healthy pricing mechanisms in widely owned asset markets. This objective is aided by the presence of sophisticated market participants: those who do not depend on rating agencies to allocate capital.
These entities play a major role in the price discovery mechanism, but their work is not easy. They need a Cryptosoft cost-effective means to quickly move and rebalance their capital in global markets. This is where stablecoins come in.